Franchise Agreement

Franchising is a contract type that allows a successful business model to be replicated by other entrepreneurs. The franchisor lets the franchisee use its brand, know-how and business system; the franchisee operates in its own name and for its own account, but according to the franchisor’s standards, and pays fees in return.

Key Elements

• Trademark licence: The franchisee uses the franchisor’s trademark and other distinctive signs; see Licence Agreement.
• Know-how: Secret, substantial and identified business information (operations manual, recipes, sourcing methods) is transferred; see Trade Secret.
• Support and training: Opening support, training, marketing and ongoing operational assistance.
• Control: The franchisor monitors compliance with standards to protect the integrity of the system.

Fees

Typically an initial franchise fee, ongoing royalties as a percentage of turnover, and contributions to a joint advertising fund. The calculation method and auditing of turnover reports should be clearly set out.

Competition Law

Franchise agreements are vertical agreements. Restrictions necessary to protect know-how and the integrity of the system, such as not opening competing businesses during the agreement and obligations to buy from designated suppliers, are generally acceptable. However, resale price maintenance and disproportionate post-termination non-compete obligations may infringe competition law. See Vertical Agreements.

Termination

On termination, ceasing use of the trademark, de-identifying the premises, returning know-how and confidentiality obligations become important. In franchise relationships with exclusive territories, a goodwill indemnity claim under TCC Article 122(5) may also be argued, unless inequitable. In contracts with foreign franchisors, choice of law and the arbitration clause should be considered separately.