Essential Clauses in Indian Franchise Agreement: A Legal Checklist
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A franchise agreement is one of the most crucial aspects of the franchise business model, and without this agreement, no relationship between a franchisor and franchisee can be legally established. So, creating a comprehensive agreement is an important step which outlines all possible terms and conditions in detail. This is created beforehand to avoid any misunderstanding or to resolve the dispute effectively.
Although there are no specific pointers to be added in such a franchise agreement, certain clauses which are common in every agreement are discussed in detail below:
• Franchise fees: This is a consideration which the franchisee pays to the franchisor for the promise to use the franchisor’s brand name and other intellectual property. This has dual benefits, on the one hand, it allows the franchisee to earn a livelihood for himself, and on the other hand, it helps in the expansion of the franchisor’s business. This includes several fees to be paid, such as the initial franchise fee, which is a one-time payment made during the time of acquiring the franchise. Apart from this, there are some fees paid periodically, such as royalty fees, marketing or advertising fees, franchise renewal fees, etc. The franchise agreement shall clearly outline the amount or percentage of fees to be paid and when they are to be paid. The amount varies depending on the popularity of the franchise in the market, and clauses regarding refunds or non-refundable fees shall also be added to avoid disputes in relation to this later on.
• Territorial Rights: The territorial rights protect a franchisee from any competition from other franchisees of the same franchise brand. Specifying a territorial area through a specific clause in the franchise agreement ensures that the franchisee gets exclusive rights to operate its unit in a particular geographical area. This allows the franchise to build a strong customer base without worrying about the internal competition. The franchisor and franchisee can negotiate on the area in which the operations of a franchise can be conducted, and if the franchisor finds it reasonable, he can also allow either his own franchise unit or another franchisee unit to operate in the area where there already exists a franchisee. This step is usually taken because it helps to franchise by increasing the brand’s overall presence.
• Intellectual Property: The intangible assets of any business are as valuable as a tangible asset, or maybe even more valuable in some cases. Thus, mentioning separate clauses in the franchise agreement is crucial as it ensures that those intangible or intellectual properties of the franchisor will not be misused by the franchisee, and in case any violation is done, the franchisee can be punished accordingly, and maybe his license to operate the franchise be taken away. Trademarks, copyrights, patents, know-how, and trade secrets are some of the intellectual properties (IP) which are to be protected. Every IP has its own special benefit, and overall, they help in registering the brand names, logos, training manuals, software, processes, methods, etc., which gives the franchise a competitive edge over its competitors and helps them establish their own identity along with brand consistency in the marketplace.
• Termination Conditions: Along with the conditions to initiate the franchise, the franchise agreement shall also contain certain clauses which tell when a relationship between the franchisor and franchisee will end and when the franchise agreement will be terminated. This termination clause is essential as it clears out the way in advance on the basis of which a franchise could end, and no unnecessary time will be wasted in that termination process. The agreement can be terminated on many conditions, such as the mutual consent of both parties to terminate, the natural expiration of the term of the agreement, breach of any condition, failure to perform or reach any target, the franchisor or franchisee becoming insolvent or bankrupt, etc. These conditions ensure that both the franchisor and franchisee are diligent in their work and accountable to one another.
• Dispute Resolution: Resolving a dispute in any business is a complex task, so to ensure smooth resolution of problems, clauses related to dispute resolution are also mentioned. These clauses shall contain the mode of resolving the dispute, such as arbitration, mediation, negotiation, or litigation, depending on the nature of the dispute. For instance, if the parties want that their dispute be kept private and speedily disposed of, they can opt for arbitration or mediation, but if they want a formal procedure to be followed, they would choose to go for litigation. These clauses shall also mention who would bear what cost, the matters for which these mechanisms will be utilized, the expert opinions that will be made available, and how confidentiality can be ensured.
• Confidentiality: Confidentiality clauses are very essential in a franchise agreement as they put an obligation on both the franchisor and franchisee not to disclose any vital information related to the franchise system to anyone outside without permission. The confidential information consists of trade secrets, operational manuals, marketing strategies, financial information, business plans, technology, and software. This confidentiality ensures that the sensitive information of the franchise is protected and that trust between the parties is also maintained. Legal implications in the event of any violation of confidentiality shall also be mentioned in the clauses. This also gives the franchisee confidence to continue innovating and improving the current franchise system and gain a competitive edge over others without any fear of losing information.
Apart from the discussed clauses, there are many other key clauses which the franchisor and franchisee can add as per their mutual agreement. There is no strict format or list of clauses to be added to a franchise agreement. However, whatever clauses are being added to a franchise agreement, all should be added after careful consideration. It is preferred to take legal advice or get it drafted by a person with experience in this field to ensure that it is clear, comprehensive, and fair from both ends.
Some common best practices for drafting these key clauses are discussed below:
• Clearly define all the key terms used in the agreement to avoid confusion.
• Avoid using technical words or jargon wherever possible, and try to make it as simple as possible.
• The numbers shall be mentioned in both numerical and alphabetical manner.
• Clearly specify the obligations of both parties with regard to the franchise before, during, and after the franchise.
• Consistent terminology should be mentioned throughout the agreement.
• Local laws of the place where a franchise operates shall be complied with, and timely updates be made to the agreement as the laws update.
• Proper procedures, guidelines, and manuals with regard to the work in franchise be provided, and updates made in such things shall be timely communicated.
• Specify which properties of the franchisor the franchisee can use and to what extent.
• Regular reports and auditing be made by a neutral party.
• Post-termination obligations shall also be mentioned.
• A notice period before termination shall be sent, which shall contain the grounds to terminate the franchise.
• Renewal conditions for the agreement could be mentioned in the agreement.
• An amendment clause shall be added to the agreement, which allows to make amendments whenever needed in the prescribed procedure.
• Benchmarks and targets be set which the franchisee has to achieve. On non-fulfilment of those targets, penalties can be imposed, and on their fulfilment, rewards can be given.
• Non-compete clauses shall be mentioned in agreements which will prevent disclosure of confidential agreements.
Nevertheless, drafting an exhaustive franchise agreement is a very difficult task, and thus the agreement shall be updated whenever it feels necessary. However, whatever changes are to be made, one thing is to be kept in mind that both the franchisor and the franchisee must mutually consent and agree to those changes, unless there could be conflicts later on.
Authored by: Adv. Anant Sharma & Sahil Arora
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