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Contractual Implications of a Franchise Agreement and Force Majeure


contractual implications of a franchise

“As a franchisor, I need to receive the royalties from the franchisee as per the franchise contract. However, when the recent pandemic occurred, the franchisee refused to pay the royalties and claimed that the situation fell under the clause “force majeure.” 

Does this clause affect the contractual implications of a franchise? Let’s discuss.” 

Introduction

Suppose you want to run a business in your local area, but you don’t have enough money to start your own business. In such cases, what will you do? Purchasing a franchise is the most suitable solution for it. However, it can only be possible if you protect your rights through a franchise agreement. But the clauses of the franchisee agreement have some impacts on the business, which are vital to know.

Franchisor, Franchisee, and Franchise Agreement: What are They?

Franchisor:

A franchisor means one who sells the right to operate a business using the franchisor’s brand and expertise, and Intellectual property rights. The franchisor’s business is the original business that sells the rights to open new branches or stores. It is important to note that the franchisor doesn’t sell its business to the franchisee; instead, it sells its “rights” to the franchisee. If they sell their business, it is a transfer of ownership. 

The business that buys the franchise rights is known as a franchisee, and the branch business is the franchisor. The relationship between the franchisor and the franchisee is more like a mentor and mentee because the franchisor continuously needs to guide the franchisee on how to run the business by training the employees, advertising and marketing, hiring staff, providing transportation, etc. There are well-known franchisors such as McDonald’s, subway, etc. 

Benefits of Franchisor:

  1. Most often, a company uses franchising as a technique to expand its business all over the world. It helps the franchisors to do business in areas where the franchisor has the slightest knowledge, and franchisees utilize the franchisor’s local knowledge to expand their business. This expansion helps grow their selling of products and build a brand image in the local areas. In return, the franchisee provides the royalties to the franchisor to access the market and the brand name by taking responsibility for the financial transactions of the building unit.
  2. Franchising can be an excellent way to increase the market share with minimal capital expenditures.
  3. The Franchisors have the freedom to determine the scalability of the business. It depends upon factors such as resources, production growth, the nature of the local market, and customer demands, and the franchisor can choose how to scale the business in those areas. It ultimately benefits the franchisor because he can achieve his pre-determined goals.
  4. The franchisor gets an additional income through franchising through royalties from the franchisee. 

Franchisee:

A franchisee is a small business operator who gets the rights to operate the main business of the franchisor. To be precise, the franchisee purchases intellectual property rights such as trademarks and the brands associated with them and uses an appropriate knowledge of the local market to sell the products and meet the standards of the original business. 

Benefits of the Franchisee:

  1. The franchisee doesn’t have to put lots of money into setting up a new corporation because a franchise costs less compared to setting up a new one. 
  2. There will be stress on marketing and campaign of the brand’s products because the consumers already know about the brand and its products, so the franchisee doesn’t need to stress upon the brand recognition.
  3. The franchisee will have a support system from the franchisor on how to operate the business. Therefore, the franchisee will not be confused in the future while operating the business.

Franchising Agreement:

A franchise agreement is a legal agreement used to protect both parties’ rights, including Intellectual property rights. This agreement sets out the contractual implications of a franchise for both the franchisor and the franchisee. 

If we talk about the rules and regulations, the UK doesn’t have specific legislation governing franchising agreements. However, the franchisee should seek a company certified by the British franchise association, a regulatory authority that helps the franchisee recognize the potential franchisors.

The UK competition act, 1998 regulates all the agreements, including the franchise agreements. Still, it only holds the anti-competitive agreements, which means the agreements which may affect trade and competition in the UK.

There are several legal steps to follow when entering into a franchising agreement, such as:

  1. Both the parties need to sign a confidentiality agreement.
  2. They must enter into a deposit agreement and must pay the deposits.
  3. The parties should set terms and contractual implications of a franchise in the agreements, which must benefit and protect both parties.
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What are the Contractual Implications of a Franchise?

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A franchisor is just like any other company that wants to expand its business with the help of franchise agreements which help the franchisor to set up the business in profitable locations and extend its business by increasing the business growth.

However, to achieve the benefits mentioned above, the franchisor needs to support and guide the franchisee in the best way possible. Therefore, the franchisor is obliged to perform the following:

  1. Marketing and advertising the brand in the whole nation.
  2. To train and recruit the staff and employees.
  3. Research and development of the new products and managing the same.
  4. The franchisor needs to evaluate the performance of the franchisee regularly.
  5. The franchisor must provide business development opportunities for the franchisee to develop more units.
  6. To ensure that the franchisee has a large territory to operate their business to prevent any infringement of rights. 

What is force majeure?

The term “force majeure” refers to a contractual implication of a franchise mentioned in the franchise agreement that is invoked in situations when an event occurs that is beyond the control of the parties and restrains them from performing their contractual obligations. 

Almost all franchise agreements include the force majeure clause, albeit in a different form. There is no specific definition of force majeure in English law. However, it seeks permission to terminate the franchise agreement because that will cause a breach of agreement if such an event occurs.

Some common events that constitute force majeure, such as earthquakes, floods, wars, terrorism, pandemics, or any governmental actions, etc., may restrict fulfillment of the duties and contractual implications of the franchise agreement. 

What is the impact of force majeure on franchise contracts?

Franchise agreements often contain the clause of “force majeure,” which means an “act of god,” though it doesn’t have a legal definition. 

Such a clause impacts the contractual implications of a franchise in case an unforeseeable situation occurs, for example, the coronavirus pandemic in the current scenario. 

Conclusion

It is a profitable idea for a franchisee and the franchisor to enter into a franchise contract as it can provide enormous growth to the business. 

Even the locals can get the benefits of using the brand’s products without having any issues with access. However, it is vital for both the parties to be obliged to their duties as mentioned in the agreement and carefully set down the terms and contractual implications of a franchise, which will benefit them. 

As a pandemic has recently hit the world, it is evident that one of the most important clauses is “force majeure,” as it deals with natural events or events that aren’t in control of the parties. Eventually, it can lead to a breach of contract. However, even in such situations, force majeure may not terminate the whole agreement if there is a possibility to do any of the contractual implications of the franchise mentioned in the contract. 

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