Franchise agreement

Franchise agreement

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This document is a basic franchise agreement, to be entered into between a franchisor and a potential franchisee.

Franchising is not a business itself, but a way of doing business.  Essentially, a franchise agreement records the respective responsibilities of the franchisor and the franchisee (and sometimes others) in the delivery of a relatively homogenous customer experience, across a network of businesses, which operate under the same brand.

The respective responsibilities can differ substantially between franchise systems, so this precedent should be used as a starting point, and a general guide only.

Using this precedent

Practitioners should have regard to the notes and comments within this precedent, and consider consulting a colleague who specialises in franchising.  Specialists are likely to be able to provide insight into typical structures, obligations and fees across the industry, and other business and strategic issues.

Within this precedent, there are several references to clauses from the Franchising Code of Conduct, which is located in Schedule 1 of the Competition and Consumer (Industry Codes—Franchising) Regulation 2014 (Cth) (Franchising Code of Conduct). These references should be checked, and clauses of this agreement drafted having regard to the relevant provisions of the Franchising Code of Conduct.  In several cases (for example, in relation to restraints) there are various alternatives, depending on how the franchisor wishes to proceed.

This precedent should be used as a starting point and general guide, and considered in the context of a number of issues, including those listed below.

Rights of parties

Practitioners should consider who owns the various tangible and intangible assets involved in the delivery of goods or services to a customer via the franchise network.

Assuming the franchisee will be operating the business, consider:

  • what rights need to be granted to the franchisee to enable this to occur;
  • to whom are the rights granted, and by whom;
  • whether there are any limits on the rights in terms of geography, premises, customers, method of sale, etc;
  • for how long the rights will be granted, including further options if the business prospers;
  • on what conditions the rights are granted;
  • what rights need to be reserved to the franchisor;
  • whether the rights are exclusive, non-exclusive or a mixture;
  • whether there are any limitations on the grant of rights; and
  • if there are any pre-conditions to retaining the rights, or minimum performance criteria.

Restrictions on operations

Other important considerations also include:

  • what, specifically, the franchisee (and possibly the franchisor or others) is permitted to sell, and what is not permitted;
  • what, if any, restrictions apply to purchasing of products, ingredients, services, etc; and
  • who pays what, to whom, when, and what happens if payment is not made as required.

Obligations of the parties

Practitioners should consider what the core obligations of the franchisor are, and what requirements need to be prescribed in relation to the location, tenure, staffing, fit-out and general operation of the business.

Also important to consider are the core obligations of the franchisee.  Much of this precedent is devoted to this issue, but there may be other obligations.  As the franchise relationship is fundamentally a contractual relationship, and as it is likely to be the franchisor who will be most keen to ensure consistency and business compliance across a long-term contract, the franchise agreement needs to be comprehensive.  The detailed system compliance, and day to day business compliance issues, are often addressed by the operations manual, as this facilitates changes that are necessary as a result of new technology, new products or services or changed consumer preferences.

Breach and termination

Practitioners should consider what can be done if the franchisee does not comply with the requirements of the system.  

Termination of the franchise agreement is the ultimate sanction, but there may need to be other consequences or remedies. The consequences of termination of the franchise agreement must also be considered.

Master franchise agreement

For franchisors seeking to enter into a master franchise agreement, see the separate precedent “Master franchise agreement”.

 

This document has been reviewed and updated by Stephen Giles, Partner, Norton Rose Fulbright. This precedent is based on precedents authored for Lexis Nexis by Mark Carkeet, Partner, Minter Ellison; Kelly Mitchell, Senior Associate, Minter Ellison and Michael Redfern, Consultant, Russell Kennedy.

This document is prepared with the assistance of Specialist Editor Murray Landis, Partner, K&L Gates.