Franchise Agreement -Sparkleminds
A Franchise Agreement (“Agreement”) is a document that enables a Parent Company
to operate through several branches run by different individuals who operate in
compliance with the standards and specifications imposed by the Parent Company
and based on its specific business model.
A Franchise Agreement begins with the date on
which the Agreement is executed and the place where it is executed followed by
the name of the parties.
There are two parties to a Franchise Agreement, the Franchisor that is the Parent Company or the Master Franchisor as the case may be, which provides the brand name, and the Franchisee, the third party which borrows the brand name to run the business.
The
owner of the business has his image and brand name associated with the
Franchisee therefore the Franchisor also has the responsibility to help the
Franchisor maintain the prescribed standards since the onus of maintaining the
same cannot be solely enshrined on the Franchisee.
Duty to Provide Financial support: A
franchisor has the responsibility to provide financial support to the
franchisor whenever required to keep up with the standards of the brand. This
could include initial setup costs or funds for effective advertisements.
Duty
to Train the Employees: It is the responsibility of the owner of the franchise
to provide initial training to the employees following the business model on
which it operates. This is to ensure that the product quality or quality of
services provided is maintained.
However, the Franchisee agreement tends to put
a cap on the number of employees the Franchisor would be liable to train to cut
unnecessary costs incurred in training when one adequately trained employee can
further train and educate the other employees, this being said the Franchisor
exercises discretion in this matter.
Provide Leadership: The Franchisor must provide guidance to the franchisee on running of the business and provide adequate solutions to any problems encountered during the process; this includes the duty to provide manuals and help to keep the Franchisee updated with the changing business model.
Benefits of Franchising Agreements
Mark Territories
to Reduce Competition: A franchisor probably lends the Brand Name to more than
one Franchisee in the same city therefore it is also important that the
franchisor.
The Franchisor lends his Brand Name to the franchisee therefore the franchisee.
Make
necessary investments: A Franchisee must uphold the image of the Franchisor, therefore
it must make all necessary investments to keep up with the standards of the
Franchisor’s business, this includes all the investments it shall have to make
for the advertisement of the business.
Work
in partnership with the Franchisor: Any Clause outlining the relationship of
the Franchisee and the Franchisor has to be very clearly drafted, a Franchisee
agreement is a mutually beneficial agreement.
Important Sections in the
Franchise Agreement
Therefore, it is the responsibility of the
Franchisee to take all the necessary approvals and suggestions from the
Franchisor for running the business as and when required.
The
Franchisee has a responsibility to comply with all the directions, but at the
same time, the Agreement must also provide some discretion to the Franchisee to
take all the necessary decisions regarding the day-to-day business.
Initiate effective communication: It is the responsibility of the Franchisee to seek help from the Franchisor wherever necessary, take permissions and approvals, and get the ideas for up-gradation of business model sanctioned from the Franchisor. For the relationship between the franchisor and franchisee to run smoothly the Franchisee has to put in the necessary efforts. Both the Franchisor and the Franchisee make necessary investments for the advertisement of the Franchisee’s business.
The
Clause specifying the distribution of advertisement costs also puts an
obligation upon the Franchisee to use the brand name to advertise only the
specific Franchisee business mentioned in the Agreement and to refrain from
causing any damage to the reputation of the Franchisee.
The rights clause highlights the specific
rights of the Franchisor to develop and promote the Franchisee business and
without causing any unnecessary fetters in the operation of business also
inspect from time to time to ensure the Franchisee business is at par with the
Franchisor’s business.
The
Franchisor has a right to operate after entering into the franchise agreement
and a right against arbitrary termination of the Agreement, however, has no
territorial rights concerning the said business. Through a Franchise Agreement,
the Franchisor confers upon the Franchisee an inalienable, non-transferable
right to use the proprietary mark.
The
Franchisee holder has no right to transfer the business to any third person
unless and until the Franchisor and the Franchisee agree to the same.
The
rights of the Franchisor are limited concerning the business and are subject to
the terms and conditions of the agreement. This is necessary to ensure the
rights of the Franchisor. In a Franchise Agreement, the franchisor often shares
its trade secrets or trade information which is exclusively in its knowledge,
after entering into a Franchise Agreement.
It
is the responsibility of the Franchisee to maintain the confidentiality of such
information while the Franchise Agreement is in option as well as after the
Franchise Agreement has been terminated.
A confidentiality clause is one of the most
important clauses of the Franchise Agreement and is drafted with utmost
caution. Such a clause clearly states that the Franchisee has a limited right
to use the right granted under any Patent, Copyright, or Intellectual Property
rights of the Franchisor, and the right only meant to be used in connection
with an existing relationship between the parties.
There
are two parties to such confidentiality clause the disclosing party, which is
to retain all the title, patents, and Intellectual Property rights, and the
Receiving Party which guarantees to abstain from disclosing any information
provided to it. It is very important to mention the commencement and expiration
date in a Franchisee Agreement very clearly. Post the expiry of the Agreement
the Franchisee can seek further renewal of the Agreement.
A
Franchisor is however awarded an additional right to terminate the Franchisee
agreements where there has been a breach of any of the conditions of the
Agreement, where the Franchisee has been incapable of operating in compliance
with the required standards, or if the Franchisee holder has been declared
insolvent.
Further,
a Franchise Agreement can also be terminated if the Franchisor is convicted of
any offense about the operation of new Franchisee business, has been unable to
keep up with the payment of fees and settlement of dues, and most importantly
acts in any manner which can potentially harm the reputation of the Franchisor.
The
severability clause is incorporated to ensure that in a condition where any
part or clause of the Agreement is deemed invalid or void according to the law,
it shall not affect the Agreement unless and until the purpose of the Agreement
is extinguished by the severing of such part. Further, the clause often has a
provision for substitution of the invalid part with the lawful valid clause.
The
jurisdiction Clause at the end of the Agreement is incorporated to specify the
place where a suit shall be filed in case a dispute ever arises between the
Franchisor and Franchisee.
The
“Article highlights
all the necessary clauses that are part of the Franchise Agreement” There is no specific
legislation that deals with the Franchise Agreement in India and the Agreement
is guided by the provisions of the Indian Contract Act, 1872, The Competition
Act, 2002, Income Tax Act, 1961, Consumer Protection Act, 1986, Arbitration and
Conciliation Act, 1996, The Foreign Exchange Management Act, 1999, etc.
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