The legal effect of franchise agreements

Franchising

Franchising is a system of marketing goods and/or services and/or technology, which is based upon a close and ongoing collaboration between legally and financially separate and independent undertakings, the Franchisor and its individual Franchisees, whereby the Franchisor grants its individual Franchisee the right, and imposes the obligation, to conduct a business in accordance with the Franchisor’s concept.

The right entitles and compels the individual Franchisee, in exchange for a direct or indirect financial consideration, to use the Franchisor’s trade name, and/or trade mark and /or service mark, know-how, business and technical methods, procedural system, and other industrial and /or intellectual property rights, supported by continuing provision of commercial and technical assistance, within the framework and for the term of a written franchise agreement, concluded between parties for this purpose.

Types of franchising

In theory and practice prevails a view that franchising comes up in two basic forms and as a production franchising and business franchising.

PRODUCTION FRANCHISING consists in the fact that the manufacturer – The Franchisor assign to the The Individual Franchisee the right to sell its own product or group of products on the market, and in some cases their right to full or partial production on the basis of licenses, know-how and experience of the Franchisor. As a rule, exclusive right to sell at exactly the right territory and market shall be assigned.

BUSINESS FRANCHISING consists in providing a range of services (ie. package of services) which The Franchisor offers to The Individual Franchisee. The Franchisor provides to the Individual Franchisee their business formula that is. way of doing business, its marketing methods, knowledge and experience, trademarks, service marks and the like. Sale to the end user shall be achieved by conclusion of two agreements, one of which is concluded between the manufacturer and the provider of franchising, and the other between the service provider and the end user franchising.

Franchise agreement

Franchise agreement is unnamed and formal agreement, synallagmatic and onerous agreement and an agreement with permanent prestations.

Franchise agreement is an unnamed agreement because it contains elements of several agreements: licensing agreement, agreements on know-how, agency agreement, employment contract, contract of sale, lease agreement.

The legal basis for the regulation of franchising in Serbia are: general business conditions, the general rules of contract law and analog application of related nominate agreements from the Law on Obligations.

In practice franchise agreement must be distinguished from licensing agreements and contracts of know-how, because usually by the franchise agreement is not transmitted only one knowledge and experience, regardless of whether it is patented or not.

The essential minimum terms of the agreement shall be the following:

  • the rights granted to the Franchisor
  • the rights granted to the Individual Franchisee
  • the goods and/or services to be provided to the Individual Franchisee
  • the obligations of the Franchisor
  • the obligations of the Individual Franchisee
  • the terms of payment by the Individual Franchisee
  • the duration of the agreement which should be long enough to allow Individual Franchisees to amortize their initial investments specific to the franchise
  • the basis for any renewal of the agreement
  • the terms upon which the Individual Franchisee may sell or transfer the franchised business and the Franchisor’s possible pre-emption rights in this respect
  • provisions relevant to the use by the Individual Franchisee of the Franchisor’s distinctive signs, trade name, trademark, service mark, store sign, logo or other distinguishing identification
  • the Franchisor’s right to adapt the franchise system to new or changed methods
  • provisions for termination of the agreement
  • provisions for surrendering promptly upon termination of the franchise agreement any tangible and intangible property belonging to the Franchisor or other owner thereof.

The legal effect of franchise agreements

Like any other contract, franchise agreement is synallagmatic agreement that creates obligations whereby on the side of the Franchisor and on the side of Individual Franchisee. In all formal (a standard) contracts of foreign companies there is a number of clauses which in a similar or identical way regulate basic rights and obligations of the parties, which characterized agreements on franchising as a specific trade law contract.

OBLIGATIONS OF THE FRANCHISOR are the following:

  • financial support
  • selection of the location and design
  • plans and specifications for the building and other improvements
  • specifications for the required equipment and furniture
  • promotion and advertising
  • assistance in employment of workers
  • training of personnel and the Individual Franchisee
  • assistance in the opening of franchising
  • textbooks for education
  • accounting
  • security of supply
  • continuing assistance in counseling, visits and training of staff.

The primary obligation of the Franchisor consisting of the assignment of sales of a particular product with using the trade name, trademark, or formula.

OBLIGATIONS OF THE INDIVIDUAL FRANCHISEE are the following:

  • construction in accordance with the plan and specification that is given
  • observance of the deadlines of construction and completion
  • observance ot the rental agreement
  • taking the necessary insurance
  • undertaking the necessary training
  • providing the necessary working personnel
  • full time job
  • purchase of the products, or other elements from The Franchisor or from a certain suppliers
  • the implementation of operations in accordance with the textbook
  • good maintenance of buildings and location
  • financial report and payment of bills upon receipt
  • proper use of the trademark
  • participation in regional and national advertising
  • transfer of business, renewal of a contract
  • fees which should be paid to the Franchisor
  • the use of the trademark, design of the location and the sale of products or services
  • inventory of the prices of the publicity, procedures and methods of calculation.

As with any other contract, the main obligation of the Individual Franchisee shall be to pay a fee for the transfer of rights.

Read more:
License agreement »
Factoring contract »
Parties to a financial leasing transaction »

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