Showing posts with label Important Sections in the Franchise Agreement. Show all posts
Showing posts with label Important Sections in the Franchise Agreement. Show all posts

Tuesday, September 21, 2021

Franchise Agreement -Sparkleminds

                                     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.


The Parent Company through the agreement shares the trademark and gains royalty in exchange for the use of the brand name.

 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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