Franchise Agreement

What is a Franchise Agreement?

A Franchise Agreement is a contract between two parties namely the franchisor and franchisee to allow the latter to use the business model or system of the former. A franchisor is one who operates a business that has been developed already. The franchisee is then allowed to use its business model or system and operate under the franchise business name in exchange for a payment of a fee or series of fees. A Franchise Agreement lays down the terms and conditions as to how the franchisee can operate the franchise business using the brand, goodwill, and reputation of the franchisor.

Illustration: Company A is a well-established fast-food restaurant that has gained popularity over the years. To allow the brand of Company A to expand in other parts of the Philippines, it now allows its business model to be used by other persons or businesses. This is called a Franchise Business. Company B now wants to operate under the business model of Company A, and to do that, they would have to enter into a contract called a Franchise Agreement.

A Franchise Agreement provides the rights and obligations of the parties. The franchisor sets what the franchisee should expect when the Franchise Agreement is executed and signed by the parties, specifically what should be done by the franchisee before, during, and after executing the agreement according to the standards laid down and instructions given by the franchisor.

What is the difference between a Franchise Agreement and a License Agreement?

While both are similar in that a person allows another to use the former's business property, a Franchise Agreement is a contract between the franchisor and franchisee to allow the latter to use the business model or system of the former. This covers the financial, operational, and marketing aspects of the business which essentially includes the franchisor's intellectual properties such as trademarks and service marks.

On the other hand, a Licensing Agreement is a document that has a narrower scope compared to a Franchise Agreement because the owner of a copyright, trademark, service mark, or other intellectual property, only allows another person to use said intellectual property, and does not include the entire business model of the intellectual property owner.

Note that a Franchise Agreement is always for a business purpose whereas a License Agreement may or may not relate to a business.

Is it mandatory to have a Franchise Agreement?

There is no legal requirement for the franchisor and the franchisee to have a written Franchise Agreement. However, it is better to have one to lay down the terms and conditions of the Franchise Agreement to enable the franchisor and the franchisee to know what is expected from each of them. This will also serve as documentation for what was agreed upon by the franchisor and the franchisee.

What must a Franchise Agreement contain?

A Franchise Agreement contains the following information:

• The details of the franchisor and the franchisee,
• The obligations of the franchisor and the franchisee,
• The location where the business will operate,
• The product or service involved in the franchise business,
• The franchise fees, other fees and the manner of payment,
• The term or duration of the Franchise Agreement,
• The insurance coverage requirements for the franchisee, and
• The rights of the parties with respect to their intellectual properties (e.g. brand marks, trademarks, service marks, etc.).

Who can enter into a Franchise Agreement?

The franchisor and the franchisee are the parties to a Franchise Agreement, meaning, they must sign the same. If the franchisor or the franchisee is an organization, the signatory may be the organization's representative.

The organization's representative must be equipped with a Secretary's Certificate if the franchisor or the franchisee is a corporation, a Partners' Certificate if the franchisor or the franchisee is a partnership, or a Special Power of Attorney if the franchisor or the franchisee is a sole proprietorship or individual before they sign the Franchise Agreement.

Note that minors or persons below 18 years of age cannot by themselves enter into a Franchise Agreement. Their parents or legal guardians should sign the agreement for them in their exercise of parental authority over the said minor.

What can be the duration of a Franchise Agreement?

The franchisor and the franchisee are free to choose a definite period for which the Franchise Agreement can last, it may be months or years. After the end of the duration of the Franchise Agreement, the parties can agree on the requirements for how the Franchise Agreement will be renewed.

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

Once the document is completed, at least two copies of the document should be printed. The franchisor and the franchisee should read the document and sign all original copies of the document, and each should keep one original copy.

After this, the document may be notarized. If the parties would want to notarize the Franchise Agreement, the document also includes an Acknowledgment portion, in which case, at least three original copies should be printed.

Notarization of the document converts the document from a private document to a public document so that it becomes admissible in court without the need for further proof of its authenticity. To notarize the document, the parties must go to a notary public to acknowledge that they have signed the Franchise Agreement freely and voluntarily. They should also present a valid I.D. issued by an official agency bearing their photograph and signature such as a driver's license or a passport, among others.

Once notarized, the franchisor and the franchisee should each keep at least one original copy of the notarized document, and the last one will be given to the notary public.

Which documents should be attached to the Franchise Agreement?

The proof of authorization for the representatives should be attached if any:

• A Secretary's Certificate if the franchisor or the franchisee is a corporation.
• A Partners' Certificate if the franchisor or the franchisee is a partnership.
• A Special Power of Attorney if the franchisor or the franchisee is a sole proprietorship or individual.

Is it necessary to notarize a Franchise Agreement for it to be valid?

No, however, notarization of the document converts the document from a private document to a public document so that it becomes admissible in court without the need for further proof of its authenticity, meaning, the document will be presumed to be validly written and signed once it is shown to court in case a dispute is brought before it.

What are the costs involved in the finalization of the Franchise Agreement?

Notarization fees for a Franchise Agreement are typically PHP100 to PHP500. However, some notaries public may charge based on the percentage of the amount of franchise fees involved, which is usually at 1%.

Which laws are applicable to Franchise Agreements?

There are no specific laws in the Philippines that regulate the relationship between the franchisor and franchisee. However, franchise agreements in the Philippines are subject to the provisions of the Civil Code of the Philippines, and the Intellectual Property Code. A franchise agreement may also governed by the 2004 Rules on Notarial Practice. It should also be noted that making untruthful statements in a notarized deed may be punishable under the Revised Penal Code of the Philippines.

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