Franchise Agreement

What is a Franchise Agreement?

A Franchise Agreement is a document between two main parties, the party that will be franchising out their already well-developed business model, called the franchisor, and the party that will be agreeing to certain terms and conditions in order to create their own franchised business based on that business model. In a franchise agreement, the franchisor lays out the expectations and requirements for a franchisee to run a business under their brand name. It can be any type of business and often, restaurants or small retail outlets are run as franchises.

Within these agreements, the franchisor and the franchisee each outline their expectations for behaviour and agree to the bounds of the relationship between them. Mostly, it is the franchisor describing rules the franchisee must follow, but there are also certain portions of the agreement that relate to the protection of the franchisee.

Is it mandatory to have a Franchise Agreement?

No, it is not mandatory. However, it is essential to have a written Franchise Agreement to ensure a clear understanding and enforcement of the franchising relationship. Since it is complicated, a written agreement will avoid any potential disputes in future.

What does the "Franchisor" mean?

A franchisor is a company or individual that owns the brand, trademark, and business, and allows another party to operate under the same brand and trademark under certain conditions. The franchisor is responsible for developing and maintaining the overall business structure.

What does the "Franchisee" mean?

A franchisee is an individual or entity running a business in the name of a franchisor business by paying upfront payment, and recurring payments to the franchisor.

What must a Franchise Agreement contain?

A Franchise Agreement should include the following clauses:

• Parties involved: names and details of the franchisor and franchisee.
• Grant of franchise: rights granted to the franchisee, including territorial limit, product limit, etc.
• Franchise fee: defines the initial fee and ongoing fee or royalties to be paid by the franchisee.
• Term and renewal: duration of the agreement and conditions of renewal.
• Franchisor obligations: support, training, and resources provided by the Franchisor.
• Franchisee's obligations: operational standards, marketing, and reporting requirements.
• Intellectual property: rules related to the use of trademarks, trade names, and proprietary information.
• Quality control: standards and procedures to maintain brand quality.
• Termination: conditions under which the agreement can be terminated.

What is not allowed in a Franchise Agreement?

The Franchise Agreement shall not include any clauses that violate consumer protection acts or rules, or which put excessive restrictions on the franchisee from doing other business, something not related to the business mentioned under the Franchise Agreement.

Who can enter into a Franchise Agreement?

Any individual above the age of 18 years and an entity registered in India can enter into a Franchise Agreement.

What can be the duration of a Franchise Agreement?

The duration of the Franchise Agreement varies from transaction to transaction. The parties can decide the period as a fixed period, or continuous business with an option to terminate by either party on certain grounds. Typically, most of the Franchise Agreements are entered for a longer duration such as 3 years, 5 years, etc.

What has to be done once a Franchise Agreement is ready?

The Franchise Agreement will be legally binding when it has been printed on non-judicial stamp paper or e-stamp paper signed by both the Franchisor and the Franchisee and has been dated. The value of the stamp paper would depend on the state in which it is executed. Each state in India has provisions in respect of the amount of stamp duty payable on such agreements. Information regarding the stamp duty payable can be found on the State government websites.

Both the Franchisor and the Franchisee should keep a signed copy of the Franchise Agreement. In order to do this, two different copies can be signed, or if only one copy is signed, it can be photocopied and then distributed between the parties.

Can a Franchise agreement be terminated?

Yes, a Franchise agreement can be terminated. The Franchise agreement is mainly terminated on the following grounds:

• Mutual agreement between both parties
• A material breach of contract by one party such as non-payment, or compromise of key confidential information to third parties.
• Completion of the agreement period mentioned in the Franchise agreement.
• Unforeseen circumstances where the project cannot be continued (force majeure event).

Which laws are applicable to a Franchise Agreement?

Franchise agreements in India are subject to the Competition Act, 2002, Indian Contract Act, 1872 and general contract principles as well as laws protecting intellectual property rights such as the Copyrights Act, 1957 and the Trademarks Act, 1999.

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