Franchise agreements and the law

26/05/2018 17:00 | Start a business

Franchise agreements and the law

The franchise agreement is possibly the most important document in the entire franchise system. It provides franchisors and franchisees with a means to define their future relationship and sets out all of the terms that will bind them for the duration of the contract. For this reason, its necessary to understand whats typically included in a franchise agreement and why. Here, we take a look at the various legal stipulations youre like to encounter when reading through such an agreement.

Legal steps before the franchise agreement

Though the franchise agreement is the most important legal document youll sign in the process of setting up a new franchise unit, several steps must be taken beforehand. If you consider the sensitive nature of many of the documents youll receive when opening a new franchise, its no wonder that non-disclosure agreements play an important role. For instance, its highly likely that youll have to sign a legally binding non-disclosure agreement before youre given access to the franchisors operations manual, as it typically contains all the information about the franchise model in use by the business.

Having signed a confidentiality agreement, many franchises will also expect you to pay a deposit before the franchise agreement is signed. In the vast majority of cases, this deposit will be non-refundable. However, some franchises allow for clauses that permit the prospective franchisee to back out, though usually only in extreme circumstances. These are the two principal commitments youll typically have to make before youre able to sign the franchise agreement.

Legislation relating to franchise agreements

While franchise law can be incredibly complicated, when it comes to franchise agreements, there's no directly relevant legislation to refer to. In both England and Wales, franchise law is yet to make it into the statute books and is only regulated by the industrys trade body, the British Franchise Association (bfa). The bfa provides franchise information, ensures franchises are operating according to the appropriate ethical standards, and runs an accreditation programme that can help reassure potential franchisees that theyre investing in a legitimate franchise. If you're looking for some guarantee that the investment opportunity you're presented with isn't a scam, the bfa is a helpful investigative resource.

Legal considerations for the franchisor

In the franchise agreement, theres going to be a large number of terms used to protect the franchisor. After all, the franchise agreement is the document that defines the franchisor/franchisee relationship and sets out each of the parties' roles and responsibilities. With this in mind, it's important to understand what kind of terms the franchisor is likely to include to protect their interests.

For instance, its almost certain that the franchisor will include terms that allow them to monitor the performance of a franchisee and take action if it falls below a minimum threshold. Likewise, the franchisor will also use the franchise agreement to protect themselves from unfair competition and to guarantee the integrity of their intellectual property. Finally, most franchise agreements include a clause that limits the franchisee's ability to act on those rights and freedoms granted to them by the franchise agreement. In other words, the franchisee can only take decisions permitted by the franchise agreement.

Legal considerations for the franchisee

Just as there are terms included in the franchise agreement that protect and benefit the franchisor, so are there terms that protect the franchisee. For the most part, these are terms that detail the different services and support the franchisor must provide to the franchisee. For instance, nearly all franchise agreements will include terms that dictate how goods and services are supplied, what training the franchisee and their staff will receive, and what additional management and support services will be made available.

Its also highly likely that the franchise agreement will tackle issues relating to who has responsibility for marketing and advertising, who provides the initial stock in the shop, and what assistance the franchisee can expect during the initial setup process.

Intellectual property rights

Intellectual property rights are an incredibly important aspect of any franchise agreement. They deal with how the franchisee can use trade names, trademarks, and copyrights. When you consider the fact that one of the principal benefits of the franchise system is the ability to operate a business under a well-known and well-respected trade name, it's easy to understand why intellectual property rights form such an essential part of the contract.

While both the franchisor and the franchisee may have to negotiate over how each party uses intellectual property, it is in both of their best interests to ensure that no 3rd party can make the most of it. Consequently, it's vital that the franchise agreement does not allow for any external use of trademarks, trade names or copyrighted materials.

Termination Clauses

Finally, all franchise agreements are likely to include some termination clauses. These are terms in the contract that describe the conditions in which it becomes possible to end the franchise agreement. While in some cases it's necessary to stipulate what will happen when the contract is terminated, in others it isn't. For instance, most franchise agreements will include a termination clause for the following eventualities;

  • A breach of contract by either the franchisor or franchisee.
  • The old franchisee sells the business to a new franchisee.
  • The contract comes to the end of its pre-agreed term, and the franchisee does not want to renew the agreement.
  • If both parties agree that terminating the contract is both necessary and desirable.

Conclusion

When it comes to signing a franchise agreement, theres an incredible number of legal considerations that you need to be aware of. While a legal advisor that specialises in franchises and contract law isnt an absolute necessity, it is highly recommended that you seek some professional guidance from a legal expert. The franchise agreement is possibly the most critical document in the entire franchising system, so it's vital that you understand it in its entirety before signing anything.

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