EM Law are experts in drafting, negotiating and advising clients on franchise agreements. Our lead contract lawyer is Neil Williamson who has extensive experience in advising clients on a wide range of commercial law matters.
Franchising is a system of marketing goods and/or digital content and/or services under which a franchisor grants a licence to a legally and financially separate franchisee permitting the franchisee to use the franchisor’s branding and operational model to set up a similar independent business. A franchise agreement is the document that outlines in legal terms how the franchisor/franchisee relationship works with respect to rights and obligations. The agreement may be a reseller agreement where the franchisee sells goods supplied by the franchisor, or the franchisee may simply provide a service under the franchisor’s brand so there is no element of resale.
There are no specific pieces of legislation in England and Wales governing franchise agreements. Provided the basic elements of a contract exist, and in particular contractual consideration is provided by both parties, there will be an enforceable franchise agreement. There are also no legal pre-contractual disclosure requirements in the UK, although overseas-based franchisors must ensure that they comply with any home country laws having extra-territorial effect.
Some franchisors will have a standard franchise agreement however some of the terms should be individually negotiated between the parties. In a franchise agreement, there should be terms which benefit and protect both the franchisor and franchisee. Typical terms of a franchise agreement include:
• The rights granted to the franchisor.
• The rights granted to the franchisee.
• The goods/services/ product to be provided to the franchisee.
• The obligations of the parties.
• The terms of payment.
• The duration of the agreement and any renewal arrangements.
• Termination provisions.
The terms of franchise agreements will vary significantly depending on the nature of the business, the level of investment and the period required to recover the investment and make a return. A franchise agreement should be drafted in such a way that the franchise can exist over a long period of time, if that is what is required.
There should always be a termination clause in a franchise agreement. Either party may find that the franchise is not working, and there is no guarantee that the relationship will be sustainable. Unjustified termination by the franchisor will give rise to claims for damages and potentially for an injunction or an order of specific performance.
The law does not generally provide for compensation to the franchisee in the event of legitimate termination by the franchisor, either on contractual expiry or on legitimate non-renewal of the agreement. However, if the correct legal construction of the contractual relationship is one of commercial agency for the sale of products (not services) by the franchisee on behalf of the franchisor as its principal, the franchisee as agent is entitled to a minimum notice, and may be entitled to compensation unless the contract specifies an indemnity payment.
A franchise agreement is an example of a situation in which know-how is communicated to the buyer for marketing purposes. Typically, rights in respect of trade marks or logos and know-how are licensed for use in connection with the distribution of the franchised goods or services. Licences of intellectual property rights in franchise agreements are covered by the vertical agreements block exemption, in so far as they do not constitute the primary object of the agreement and are directly related to the use, sale or resale of the franchised goods or services. The vertical restraints guidelines also acknowledge certain obligations which are generally considered necessary to protect the franchisor’s intellectual property. These include:
• Not to engage, directly or indirectly, in any similar business.
• Not to acquire financial interests in the capital of a competing firm which would give the franchisee the power to influence the economic conduct of that firm.
• Not to disclose the know-how provided by the franchisor to third parties, as long as the know-how is not in the public domain.
• To communicate to the franchisor any experience gained in exploiting the franchise and to grant it, and other franchisees, a non-exclusive licence for the know-how resulting from that experience.
• Not to use know-how licensed by the franchisor for purposes other than the exploitation of the franchise.
• Not to assign the rights and obligations under the franchise agreement without the franchisor’s consent.
The guidelines state that such use-restrictions are covered by the block exemption.
For any questions you may have concerning franchise agreements contact Neil Williamson.
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