How To Contract | Franchise Agreement

INTRODUCTION

A Franchise Agreement is a legally binding document between the Franchisor and the Franchisee. The Agreement consists of all the clauses stating what the Franchisor expects from a franchisee while operating a business. Even though there is no standard form for any franchise document, yet the general clauses define the purpose, terms, and conditions of a franchise. The case, which has been provided, describes about the franchise agreement formed by the restaurant holder. The basic requisites of the same are mentioned hereunder.

Restaurant Franchising Agreement  

Restaurant franchising has some peculiar characteristics involving grant by an established brand providing rights to some other entity or restaurant. Such rights can be of name, recipes, products, trademark, etc. In this way a restaurant, conduct its business through a franchise forming a restaurant chain. In such agreements, the terms and conditions of every aspect related to restaurant describing food menu, designs, layouts, and service staffs are mentioned elaboratively.

Essential clauses

The restaurant franchise agreements are governed by not a single law but by multiple legislations. The basic clauses of any agreement along with other ones can be understood as ahead:

Introductory Clause

As every agreement needs essential clause stating the day and date on which such agreement is taking place along with the names of parties in an agreement, a franchise agreement also consists the same, hereby, ‘Agreement between a franchisor and the franchisee.’

Recital Clause

This clause gives us an idea stating the purpose of the franchise agreement. It consists of what the franchisor ought to give the franchisee rights pertaining to the restaurant by adhering to certain terms and conditions.

Definitions and Interpretations

Certain terms mentioned in an agreement must be defined as well as interpreted as per the nature of the agreement. For e.g. – Location of the restaurant and its territory must be specified, proper definitions of products included in a restaurant, period of a franchise agreement, applicable laws, etc.

Grant of the Franchise/Consideration

Here, the franchisor voluntarily grants providing the franchise to the franchisee and mentions that such grant shall be made if the franchisee pays the decided amount on time-to-time basis as per the given agreement known as royalty and franchisee fee.

Services, Terms and Conditions

This clause is pre-dominant where all the services provided along with certain terms and conditions are thereby mentioned. This clause consist of ‘commencement’ i.e. the date from which the franchise can start working,  location, business promotion services, products, Intellectual property rights concerning the delivery of the services and the declaration stating that the franchise conducting its business shall be in accordance with applicable statutes, government notifications and the agreement.

Confidentiality

This clause states that whatever information a franchise may receive must be kept in secrecy and not to be disclosed with anyone at any time. Such disclosure only shall be made with the consent of the parties mentioned in the agreement. For disclosure of the revenue agreement, a franchise must have a prior written consent.

Protection of Intellectual Property Rights

A franchise agreement involves some type of transfer of Intellectual Property and the same must be protected in order to avoid the breach of the same. The Intellectual Property license is the core requirement of any franchise agreement and the laws governing such licenses are mentioned in several national IP laws such as Copyrights Act, 1957, Patents Act, 1970, Trademarks Act, 1999, etc. Such Intellectual property used by the franchisor must not be anytime misused by the franchisor which prejudicially will affect the agreement within the term or after.

Franchisor’s Obligations

A franchisor is a person who gives a franchise and thus is entitled for some liabilities as well. Such obligations can be –

• Assisting the franchisee in locating the place for the franchise outlets
• Permitting the franchisee to continue the project
• Give management advice regarding a project

Franchisee’s Obligations

Along with franchisor’s obligations mentioned above the franchisee has also some other obligations which can be –

• The prime obligation of a franchisee is to maintain the franchise units with reasonable care.
• Franchisee is under obligation to maintain the reputation and goodwill of the brand.
• Provide periodic reports to the franchisor related to the business.

Advertising and Marketing Clause

The franchisee has the right to advertise its business with the approval of the franchisor and such advertising must be favourable to the franchisor as well as his business. 

Term of an Agreement

An agreement must have a specific term, which is counted from the signing of the agreement. It can be extended at the consent of the parties and renewal fee must be paid.

Termination

Either party may terminate the agreement by submitting the prior notice. Such termination may be subject to immediate effect on the reasons of any breach or violations of the terms and conditions as well as failure of the franchise to provide services to the customers as per the expectations of the business. The agreement may also withhold the effects of the termination.

Dispute Resolution and Jurisdiction:

Any disputes or claims, which may arise as a part of this agreement, can be resolved by arbitration in accordance with the legal provisions. The rights and obligations of the parties along with the arbitration agreement enforced under this clause shall be governed by and subject to Indian law and the agreement shall be subject to the respective jurisdiction of the happening of an event. In case of a franchise agreement between an Indian entity and foreign entity, the parties to the agreement can designate the law of a foreign country as the governing law and submit to the exclusive or non-exclusive jurisdiction of a foreign court, provided such foreign court has inherent jurisdiction over the dispute.

Concluding Clause

The franchise agreement for restaurant shall have a concluding clause stating names of the parties, place where agreement has been exercised, day, date and the authorized signature. The agreement shall be executed in present of two witnesses where it is also important to have a name and signature of the witnesses.

Thus, these are the clauses, which are essential to have a valid franchise agreement.

Boilerplate Clauses

Such clauses are the standard clauses that are routinely used in an agreement. These clauses address general business contract provisions, which are routinely used in the agreement and franchise agreements, are no exception to it. The boilerplate clauses contain:

• Indemnification clause: These clauses are used to shift liability from one party to another. Here, the franchisor shifts his liability to franchisee until a reasonable extent.
• Venue clause: These clauses commonly require all disputes to be submitted into arbitration, mediation or litigation in the city where franchisor’s headquarters are located.
• Waiver clause: It is an important clause that is added in the franchise agreement. Waiver of jury trial and waiver of punitive damages are the types of it.
• Force majure clause: The importance of this clause under the boilerplate clause came into picture after the COVID-19 pandemic. During such unprecedented situations, critical protection to the franchise can be made either financially or through other ways in order to maintain the business and prevent it from sinking down.
• Non-solicitation Clause: This clause states that if franchisee of a business leaves that business and joins another one, he must not solicit or attract the clients or investors of previous business into new one. Such confidentiality shall be maintained of while joining or creating any new business.
• Severability Clause: The clause is added in the agreement stating that if any part or provision of the agreement is prohibited, void or unenforceable shall be held ineffective without affecting the other provisions of the agreement.
• Survival Clause: The Survival clause allows the parties to mutually agree to maintain enforceability and legally binding status of certain contractual obligations after the termination or the expiration of the said agreement.

Boilerplate clauses are thus held to be the most important and efficient one which make the agreement legally valid along with such minute intricacies.

Sample Draft

DRAFT OF A FRANCHISE AGREEMENT

This AGREEMENT entered into on the 20^th day of January, 2023.

BETWEEN:

‘Burger King’ a restaurant, registered under Shop & Establishment Act, having its Registered Office at Mumbai, represented herein by its owner Shri. XYZ (hereinafter referred to as the ”Franchisor”, which expression shall, whenever the context so requires or admits mean and include its successors and assigns) of the ONE PART;

AND

‘Burger Spot’, having its place of Business at Delhi represented herein by its Owner  Shri. PQR  (hereinafter referred to as the ”Franchisee”, which expression shall, unless the context so requires or and permitted assigns) of the OTHER PART;

NOW THIS AGREEMENT WITNESSETH AS FOLLOWS

That in consideration of the foregoing, the Franchisor hereby appoints M/s ABC as its Agent in the City of Mumbai upon the following terms and conditions:

1.  The retail outlet for opening a franchise under the name and style of ”Burger King” shall be set up and run in the Premises made available by the Agent, which premises is more fully described in the Schedule Premises”. The premises will be made available free of cost or charges to franchise by the Agent during the subsistence of this Agreement.

2. The Agent will meet and bear the entire cost of furnishing and decorating the interior and exterior of the Schedule-Premises in accordance with the specifications and requirements of franchise, particularly touching upon the following aspects — elevation, décor and interior design, food menu, rates, recipes, etc. the cost of which is estimated to be of the order of Rs 50 Lakhs (Rupees Fifty Lakhs) He shall also provide necessary warehousing facilities and office space for the Restaurant’s representations.

3. The name of the Franchise shall be promptly and clearly displayed as ‘Burger Spot’.

4. The Agent at his cost will employ necessary personnel to man and manage the Restaurant outlet.

(The clauses mentioned above are added as per the requirements of the parties in the provided format itself)

IN WITNESS WHEREOF the parties above named have executed these presents in the presence of the Witnesses attesting hereunder on the dates and place mentioned herein below:

Place:

Dated:

For Franchisor For Franchisee

WITNESSES

1. ()

2. ()

Written By:

Chinmayee Kulkarni
4th year BALLB
MMM’s Shankarrao Chavan Law College, Pune.

References –

1. https://lexforti.com/legal-news/franchise-agreement/
2. https://tremblylaw.com/8-common-boilerplate-clauses-and-why-they-matter/
3. https://www.sparkleminds.com/docs/franchise-agreement-pdf/
4. https://www.indiafilings.com/learn/elements-franchise-agreement/