Purpose of a franchise agreement
The purpose of a franchise agreement is to organize the relationship between a franchisor – a manufacturer or supplier of products or provider of services, who owns the relating trademark and know-how, and a franchisee – a company or individual willing to distribute such products or services under the franchisor’s trademark and benefit from the franchisor’s know-how. A franchise agreement is therefore characterised by:
a license, by the franchisor to the franchisee, of a brand name and/or a trademark under which the franchisee will distribute the products or provide the services
the provision, by the franchisor to the franchisee, of know-how and technical expertise relating to the products or services, and
the provision, by the franchisor to the franchisee, of technical and commercial assistance in relation to the distribution of such products or services.
Forms of franchising
As regards international distribution of products or services, a franchising agreement may be organized under one of the following forms:
Direct Franchise
In a direct franchise system, all franchisees will be selected directly by the franchisor. In this case, a franchisee will be allowed to develop the brand and distribute the products of the franchisor in a very limited territory or in certain specified outlets. The franchisee will not have the right to grant sub-franchises, as the organization and monitoring of the franchise network will be ensured directly by the franchisor.
This method of franchising, which allows the franchisor to directly control its franchisees, requires that the parties be able to communicate easily. Direct franchising is therefore generally used for building franchise networks in neighbouring countries, whose laws, customs, culture and language are similar to those of the country in which the franchisor is established.
Joint-Venture Franchise
In a joint-venture franchise, the franchise will be operated by a joint-venture company set up jointly by the franchisee and the franchisor. In this case, the rights and obligations of the parties in relation to the franchise will be governed not only by a franchise agreement, but also by a shareholders’ agreement. The presence of the franchisor in the share capital of the joint-venture company will enable the franchisor to exercise closer control over the activities of the franchise company, to ensure that the latter complies with the commercial and strategic policies of the franchisor, and to protect more efficiently the franchisor’s intellectual property rights and know-how.
Master Franchise
In a master franchise system, a master franchisee (also called main franchisee or sub-franchisor) will undertake to not only distribute the products or services of the franchisor in a given country, but also to build a sub-franchise network by selecting and engaging sub-franchisees. Sub-franchisees will be selected according to criteria determined by (or with) the franchisor, whereas the control of the sub-franchise network will be ensured by the master franchisee. This form of franchising, where the franchisor is discharged from the obligation to organize and control a local franchise network, is generally used to build such networks in distant markets or countries, whose direct access by the franchisor may be difficult due to distance, significant economic or cultural differences. The implementation of such a system requires the franchisor to make sure that the master franchisee has solid experience and the financial and organisational capacities necessary to build the franchise network in the concerned region.
Rights and obligations of the Franchisee
A franchisee may be required, inter alia, to comply with the following obligations:
obligation to finance the creation of one or more outlets according to specifications provided by the franchisor
obligation to promote the franchisor’s products in the territory (the agreement may provide for an advertisement budget, periodic advertisement campaigns, etc., under the control of the franchisor)
obligation to comply with the specifications of the franchisor as regards the operation of the outlets and the distribution of the products
obligations to purchase the products exclusively from the franchisor (or from resellers authorized by the Franchisor) and not to distribute competing products
obligation to ensure the protection of the franchisor brand name and trademark (duty to inform the franchisor of any infringement of which the franchisee may be aware, not to challenge the validity of the franchisor’s trademark in the territory, not to file or use a trademark or distinctive signs which may lead to confusion with the trademark of the franchisor)
obligation to monitor the distribution of the products and ensure the required regulatory monitoring of the same
obligation to maintaining a minimum volume of stocks, to provide the franchisor with period sales reports and sales forecasts
obligation to subscribe for insurance in specified amounts
obligation to translate commercial documents into the applicable local language and ensure their compatibility with local laws
obligation of confidentiality as regards financial information, know-how and trade secrets disclosed by the franchisor
obligation to indemnify the franchisor in the event of breach by the franchisee of its contractual obligations
etc.
In consideration of complying with its obligations, the franchisee may be granted, inter alia, the following rights:
exclusive or non exclusive right to distribute products in a specified territory under the trademark and/or brand-name of the franchisor
right to obtain technical and commercial assistance, as well as training, from the franchisor
right to use the marketing materials prepared by the franchisor
etc.
Rights and obligations of the Franchisor
A franchise agreement may provide, inter alia, for the following rights and obligations of a franchisor:
right to periodically conduct an audit of the activity and accounts of the franchisee
right to receive compensation in consideration of the rights granted to the franchisee. Such compensation may consist, inter alia, in a lump-sum fee, payable upon conclusion of the contract (“droit d’entrée”), periodic royalties based on the franchisee’s turnover, as well as compensation for services provided to the franchisee, such as technical assistance, training, etc.
right to terminate the contract for breach by the franchisee of certain obligations;
right to buy the goodwill developed by the franchisee subject to certain conditions on termination of the franchise agreement
certain obligations regarding the franchisor’s trademark, brand name or other intellectual property rights licensed to the franchisee
obligation to provide technical assistance to the franchisee, such as assistance in the preparation of the franchisee’s business plan, internal audits, training of personnel
etc.
It should be noted that, pursuant to French law, a franchisor is under the obligation to disclose to the franchisee, prior to the conclusion of the franchise agreement, certain information regarding the franchisor, the market covered by the franchise, the existing network of franchises, etc. Failure to provide such information may be sanctioned by the nullity of the franchise agreement.
Main provisions which may be contained in a franchise agreement
In addition to describing the franchise method used by the parties, and their rights and obligations, the franchise agreement should also contain:
provisions relating to the placement, acceptance and cancellation of orders, stock inventories, sales forecasts, terms of delivery (transportation, return), resale prices, payment terms, etc.
provisions relating to the duration of the franchise agreement, termination for cause, renewal
provisions relating to the relationship of the parties (independent contractors, no assignment clause)
etc.
Franchise agreements are often complex agreements, which in addition should comply with French and EU rules on free competition. Their drafting and review requires therefore the intervention of a specialised lawyer.
