The Franchise Agreement

The franchise agreement can be roughly synthesized as containing three main components: the pre-contractual requirements such as disclosure, the ongoing and post-contractual rights, and obligations of both the franchisee and franchisor.^[1] The International Chamber of Commerce has created a model international franchise agreement that contains many of the most common clauses found in an international franchise agreement,^[2] but is also applicable to domestic franchise agreements.^[3]

The federal requirements before signing a franchise agreement will be addressed in a later blog; however, a large part of how the federal government regulates franchising is through the FDD.

A franchise agreement needs to be accurately drafted according to the various state and federal laws that govern that specific business format franchise. Therefore, franchise agreements vary from each other. For example, an investor can purchase a cheap and straightforward hotdog franchise, which would not require a lengthy franchise agreement. However, if the investor is buying a hotel franchise worth millions of dollars, the agreement will be more complex and more prolonged.

Of course, the boilerplate clauses will be included in almost every instance: such as the term of the agreement, indemnity, venue, applicable law, and the method of dispute resolution.

On the whole, the franchise agreement lists multiple obligations for the franchisee and few for the franchisor. This is because the franchisor is incentivized to act in the best interest of the franchise that they have created. Respectively, the investor is a party that wants to partake in the benefits that the franchisor has created with its brand and business operating system. Therefore, a disparity is created from the outset in terms of what rights and obligations are assigned to each party.

[1] Martin Mendelsohn, The Guide to Franchising, 187-204 (7th ed. 2003); International Chamber of Commerce, Model International Franchising Contract (2011).

[2] International Chamber of Commerce, Model International Franchising Contract 3 (2011).

[3] See Id.