How Well Do You Know Your Franchise Agreement?

August 6, 2018

This article was first published by Global Franchise Magazine in June 2018. It speaks to a UK audience of businesses and individuals who are new to franchising and provides guidance on key issues to cover in the franchise agreement.

What is a franchise agreement?

Sounds like an obvious question, in its broadest sense the “F” word describes any third party relationship in which one business is licensing its key intellectual property, such as the trademark, copyright in materials, any proprietary software and its know-how to enable another business to replicates how it operates and sells its products and services. Typically this is characterised as a “business format” franchise, but the relationship can have varying degrees of control and different monikers, such as “JV partners”, “franchise partners”, “licensees”.

The franchise agreement will also cover the franchisor’s provision of initial and ongoing support and training, and also some centralised services. There will be a long list of the franchisee’s obligations to follow the system and comply with guidelines. The franchise agreement will also set out the key financial obligations and what happens when the relationship comes to an end.

The franchise agreement sits alongside the operations manual and the business plan – all three documents together form the foundation of a franchisee’s business, so it is essential that both parties fully understand the terms of the franchise agreement, otherwise they will not have a strong foundation on which to build a successful business relationship.

Why are franchise agreements so one-sided?

Franchise agreements differ from many other forms of commercial contract in their one-sided nature. But there is a good reason for this: by joining a franchise network and growing a business using the franchisor’s brand, know how, products and support, a franchisee is entering into a legal relationship which is very different from bi-lateral commercial agreements. The franchisor has to be able to monitor, audit and effectively police its network of franchisees in order to ensure uniformity of brand experience and brand standards. Equally, the franchisor is placing its core business asset, its IP, in the hands of a third party, so there has to be a firm commitment to adhere to standards and develop the business in accordance with certain standard.

The upshot is that the franchise agreement must therefore be biased in favour of franchisor, otherwise the network is built on a house of cards. The litmus test for any compromise on a franchisor’s standard terms is; “what would happen if this compromise was given to all franchisees”? If the answer is that it would lead to an erosion of the franchisor’s ability to protect its IP, change and update its system/consumer offer and police and enforce brand standards, then the compromise must be rejected – crucially, this unilateral approach will benefit compliant franchisees, as it means that quality standards will be high, it shows that the franchisor cares and that bad performing franchisees should not be able to undermine the network.

What laws apply to franchising in the UK?

There is no franchise-specific legislation in the UK. However, the general principles of contract law apply to franchise agreements. The Unfair Contract Terms Act 1977 applies to exclusions and limitations of liability in standard form business to business contracts (business format franchise agreements usually fall into this category). UK and European competition law also applies to franchise agreements, and in particular to terms which deal with online rights, exclusive territories, retail price maintenance and non-competition restrictions.

The British Franchise Association (BFA) is a trade body which promotes ethical franchising in the UK. Its franchisor members (and their franchise agreements) are required to adhere to the BFA’s Code of Ethics as a condition of membership.

From a franchisor’s perspective, what are the 5 key issues to cover in a franchise agreement?

  1. Clarity over the grant of rights, and what is reserved to the franchisor
    If a franchisor is offering a territory based franchise, it should only grant the minimum required territory and impose performance targets, to ensure that the territory is fully exploited and that the franchisee has the capability of utilise it fully. Understanding your target territory and the capability of the franchisee is crucial. Franchisors should resist the temptation to grant blanket exclusivity and if necessary use rights of first refusal. It is easier to increase the territory later than reduce it. Franchisors of certain systems (particularly in the retail and leisure and hospitality sectors) should think increasingly about exclusivity both in terms of geography and “channels”.
  2. The ability to evolve the system
    Franchise agreements are often long term commercial contracts which are set in stone on the day they are signed. The operational manual is a living and breathing document which will evolve over time as the system changes, and it is therefore vitally important to ensure that the franchise agreement and operational manual work in tandem and strike the right balance between legal and financial certainty for the franchisee and the franchisor’s need to innovate and drive changes through the system to ensure that the franchise remains competitive. If the right balance is not achieved, a franchisor may find itself unable to develop the system or forced into developing a two or multi-tiered system in which a consumer’s experience of the brand may vary from market to market, or from franchisee to franchisee.
  3. Protecting the know-how
    Restrictive covenants (“RCs”) are very common in franchise agreements. They seek to protect goodwill and customer relationships by limiting the licensee’s right to operate a competing business both during the term and after the termination or expiry of the agreement. RCs will typically comprise of undertakings of non-solicitation, non-dealing, confidentiality and non-competition and have a specific duration and/or geographical reach. RCs can be vital in protecting the integrity of a brand’s network.RCs must comply with applicable competition law and common law principles on restraint of trade. To be enforceable, RCs in franchise agreements must therefore strike a delicate balance between protecting the franchisor’s legitimate business interests and at the same time not being overzealous in their scope and duration. Poorly worded RCs could render the entire clause, or possibly the franchise agreement, unenforceable. RCs that fall foul of competition law also risk exposing the parties to the agreement to investigation by the UK or EU competition authorities and fines for infringement of the competition rules. A franchisee that suffers loss as a result of an anti-competitive RC may also have a damages claim against the franchisor.
  4. Managing risk
    From a financial perspective, it is important that the franchise agreement clearly sets out all of the relevant fees and payment obligations. A common blind spot is who is responsible for the franchisor’s costs in providing initial and ongoing support and assistance and conducting inspections and audits in the franchisee’s territory. Equally, where a franchisor supplies goods on credit to the franchisee, or facilitates a direct relationship between each franchisee and its nominated supplier, it is important that the franchisor can monitor the credit risk and take action, as the risk of systemic financial exposure and damage to the brand is significant.Other areas of increasing importance are those sections in the franchise agreement which relate to online promotional activities, e-commerce and data protection. All 3 are key touch points with customers, so it is important that the franchise agreement sets the framework for how these interactions should operate.
  5. Exit/investment planning for the franchisor
    Franchisor’s should plan for an exit that is smooth, causes the least disruption to the network and maximises the value. It is important that your franchise agreements facilitate this and do not act as a blocker on any potential investment into or sale of the franchisor. Change of control and assignment provisions must enable a franchisor to dispose of its business without having to seek individual consents from franchisees.

From a franchisee’s perspective, what are the 5 key issues to look for in a franchise agreement?

  1. Is the franchisor the owner or licensee of the IP and know-how, and what are they prepared to guarantee about a franchisee’s such of such IP and know-how?
    One of the key pieces of due diligence on a franchisor is to check what trade mark protection they have in place and whether they own those registrations, or are simply licensed to grant franchises.

    In relation know-how, the European Code of Ethics for Franchising (“Code of Ethics”) – which is designed to promote ethical franchising in Europe and provides the franchise industry’s foundation for voluntary self-regulation – was recently updated and one of the new obligations on franchisors (i.e. franchisors who are members of a national franchise association like the British Franchise Association in the UK) is to guarantee the right to use the know-how transferred and/or made available to the franchisee, which know-how it is the franchisor’s responsibility to maintain and develop.

    This is an interesting addition to the Code of Ethics, particularly in light of recent case law in key franchise jurisdictions such as Canada, where franchisees have successfully sued their franchisor for failing to protect their businesses from innovative competitors;

  2. Obligation to evolve the System and police the network
    For franchisees, franchisors should be duty bound to develop and innovate the system and keep it competitive against other similar systems. Furthermore, the franchisor’s desire to have the broad rights to monitor the network and enforce contractual terms should arguably extend into an obligation to police the network and sanction franchisees that do not play by the rules.
  3. Online rights
    Franchisees need to understand how they promote their business and even sell their services and products online. Therefore, it should be incumbent on a franchisor to inform prospective and individual franchisees of their internet communication and/or sales policy. It should not be acceptable for some franchisors to hide behind the opaque pretence of “prior written consent” before a franchisee is allowed to participate in online activities.
  4. Good faith and fair dealing
    There is clear recognition in the Code of Ethics that the franchisor/franchisee relationship should be underpinned by the principles of good faith & fair dealings. Both are expressly included in the preamble to the Code of Ethics, which emphasises the importance of franchisor-franchisee relations based on fairness, transparency and loyalty, each of which contribute to confidence in the relationship. Franchisees should check dispute resolution clauses to see if they contain an escalation process for resolving complaints, grievances and disputes with through fair and reasonable direct communication and negotiation. If this fails, the agreement should be clear how disputes are finally resolved, for example through the courts, mediation or arbitration. Arbitration can be a very expensive blunt tool for resolving for domestic disputes in the UK (although it has advantages in an international context).
  5. Exit planning
    Franchisees should have the right in most cases to sell or transfer their business as a going concern during the term of business. For larger franchisees, it is also important to ensure that they have the ability to transfer shares between existing owners, assign rights as part of a corporate restructuring exercise, or take third party investment, provided that such activities do not materially change the ultimate management of the franchisee or compromise the franchisee’s contractual obligations around issues such non-compete restrictions and secured interests.

Source: Mondaq

Joint Venture Franchises: The Whys And Wherefores

August 5, 2018

Franchising provides a flexible model for growth or re-engineering, with a variety of structures to meet different needs. Of all the structures the joint venture franchise is the least understood and most likely to cause difficulties, if not structured correctly. In order to understand why this is so, it is necessary to consider the rationale for using the joint venture model and the manner in which the relationship should be structured.

1. What is a joint venture franchise?

From the outset, the name itself is misleading. It implies that the joint venture and franchise are one and the same, often documented within one legal contract – a joint venture franchise agreement. That perception is the root cause of many problems encountered with this model. A “joint venture franchise” is shorthand for the grant of a franchise to a joint venture party.

2. Why would a Franchisor adopt a joint venture model?

There are many reasons why a franchisor might consider adopting a joint venture structure but they often involve two, diametrically opposed, objectives. Either the franchisor wishes to exert greater control over the franchisee or it wishes to show greater commitment to the franchisee, by committing its own resources to the franchise.

The controlling franchisor

In a traditional franchise model the franchisor relies on the contractual terms within the franchise agreement to control the franchisee. This control often extends beyond the manner in which the franchisee operates the franchise business and touches upon the franchisee’s access to working capital, the identity of directors/shareholders and their other business interests and typically creates consequences if there is an unapproved transfer of shares in the franchisee. This level of control is often sufficient for franchisors, representing the right spot on the risk/reward graph.

However, for some franchisors this contractual control is not enough and they want the added influence provided by a joint venture. With a joint venture franchise the franchisor maintains its contractual control through the terms of the franchise agreement but this is underpinned by a further layer of control at a corporate level, through the joint venture or shareholder arrangement. By taking an equity interest in and possibly a seat on the board of the franchisee company the franchisor can influence, and potentially direct, the conduct of the franchisee business. This influence can extend to all aspects of the franchisee’s internal operations including recruitment, site selection, business planning and pricing.

The nurturing franchisor

In contrast, franchisors may adopt the joint venture model simply to provide greater assistance to the franchisee. This assistance can take a number of guises but is typically the injection of capital in return for an equity stake. The capital might be paid in cash or simply a waiver of the initial franchise fee, allowing the recruitment of young, enthusiastic franchisees who might otherwise struggle to raise the necessary capital to invest in the start-up of the franchise. By taking an equity stake the Franchisor is showing its own commitment to the franchisee’s business, the franchisor has “skin in the game”.

Other reasons behind joint ventures

There are other factors that may influence the decision to adopt a joint venture model including:

  1. Legal necessity – there are certain jurisdictions that require a franchisor to open and operate its own corporate units before it can set up a pure franchise network. Setting up a joint venture with a potential franchise partner can allow the franchisor to comply with this requirement but still press ahead with an entry into the market;
  2. Testing a market – from a franchisor’s perspective, there is a strong temptation to convince potential international franchise partners that the franchisor’s domestic concept is immediately transferable to another country without the necessity of setting up a pilot or group of pilot locations. A joint venture can be used to test the concept in a new market before employing a pure franchise model.

However, perhaps the most common reason in current times to use a joint venture model is for the purposes of a future strategic buy-out.

3. Strategic Buy-out

A Strategic Joint Venture can be used as a sequenced market entry strategy by which the franchisor agrees that it and a franchise partner will together set up a “special purpose vehicle” to act as the franchisee to establish the franchise business (under the terms of the franchise agreement granted by the franchisor) with the stated aim that the franchise partner would transfer its interest in the special purpose vehicle to the franchisor in due course at a pre-agreed formula based price.

In return for the franchise partner making the requisite investment in the franchisee business the franchisor allows it to participate in the generation of a strong income stream with a predetermined fixed-term exit strategy on an agreed valuation coupled with a release of its written down capital investment.

This buy-out structure can, of course, be attempted by way of a contractual provision in the franchise agreement. However, this often causes confusion in the negotiations and a lack of clarity on the final agreement. It also results in the acquisition of a company that has not been operated with the franchisor’s input and therefore is not culturally attuned to the franchisor’s expectations and so becomes difficult to integrate into the group.

The key difference between a Strategic Joint Venture and the many other types of joint venture franchise is the level of control and day to day involvement of the franchisor in the management of the franchisee. Strategic Joint Ventures tend to require more involvement of the franchisor whereas other structures are designed for minimal day to day involvement from the franchisor.

4. How to structure a joint venture franchise

No matter what the purpose behind adopting a joint venture model, the structure should be broadly the same. There should be a two layered relationship between the franchisor and its franchisee.

The first layer is the contractual “franchise” relationship under which the franchisor grants the franchisee the right to operate the franchised business. The terms of this relationship are governed by the franchise agreement.
The second layer is the “equity” relationship under which the franchisor takes an equity stake in the franchisee, in return for giving some value to the franchisee (such as a waiver of initial fees of a capital investment). The terms of this equity relationship are governed by the shareholders’ agreement, often referred to as a joint venture agreement or a subordinated equity agreement, because the equity control is subordinate to the primary contractual control.

The following diagram illustrates a typical joint venture structure.

5. Key issues in joint ventures franchises

When embarking on a joint venture, it is best to keep the following best practice tips in mind:

(a) Avoid conflicts of interest

Above all, the franchisor must distinguish between its role as franchisor and its role as a shareholder in the franchisee. There is an inherent conflict of interest between the two roles and a failure to separate those interests brings significant risks. This is particularly true within a Strategic Joint Venture where the franchisor is likely to have a representative on the franchisee’s board.

It is not hard to imagine situations where the franchisor can be exposed to unacceptable levels of risk through its exercise of shareholder or board influence over the franchisee. Examples include making decisions on employee recruitment and dismissals within the franchisee (raising fears of the franchisor being a joint employer) or pushing through system-wide changes required by the franchisor without due regard to the impact on the franchisee.

One of the most effective ways to maintain this separation of interests is to ensure the two layers of the relationship are maintained – the franchise agreement and the joint venture agreement.

(b) Duty of good faith

A growing line of UK authorities have held that a duty of good faith could be implied into ordinary commercial contracts and whilst it should not be implied by default, it is more likely to be implied into “relational” contracts – i.e. long term commercial relationships which require a high degree of trust and cooperation, like franchise agreements and joint ventures.

In the recent case of Nehayan v Kent [2018] EWHC 333 (Comm), Lord Justice Leggatt noted that whilst “the parties to the joint venture were generally free to pursue their own interests and did not own an obligation of loyalty to the other, it would be contrary to the obligation to act in good faith for either party to use his position as a shareholder of the companies to obtain a financial benefit for himself at the expense of the other”.

Whilst this ruling by no means provides that all joint ventures will contain an implied duty of good faith, when entering into any form of joint venture the franchisor should be careful that its actions are not contrary to the principles of good faith. The franchisor should control and reduce this risk through careful contractual drafting.

(c) Maintain separate agreements

All of the operational controls should be maintained through the franchise agreement. Duplicating or repeating similar or related items in the joint venture agreement should be avoided. In fact, the franchise agreement used with a joint venture franchisee should really be no different from the franchisor’s standard document.

(d) Cross-default

Termination of the franchise agreement should automatically lead to the winding up of the special venture vehicle. The opposite is also true, if a deadlock arises within the special purpose vehicle then most likely the franchisee will be unable to operate. Certainly relations between the franchisor and franchise partner will mean that it would be preferable if the franchise partner was no involved in the franchise network.

(e) Foreign Direct Investment/Tax

In some countries the franchisor cannot own more than 50% of the shares in the franchisee company. In these cases, ensuring the franchisor has control under the franchise agreement is even more essential.

However, it is important to take local advice on the structure to ensure that by becoming a shareholder in a local company with a seat on the board, the franchisor and/or and its directors are not exposed to onerous tax liabilities, or other types of personal and fiduciary duties.

6. Conclusion

Joint venture franchising is a dynamic but complex commercial model that can be used to achieve a variety of strategic purposes. It is important that both the franchisor and the franchise partner understand each other’s objectives and devise a version of the model which is aligned with those objectives. The more the parties invest in the planning and structuring stage, the more likely that the joint venture will deliver long term success for both the franchisor and the franchise partner. Above all, it is crucial that the franchisor’s roles are clearly delineated and that the two layers of the relationship – the franchise and the joint venture – are kept distinct.

Source: Mondaq

Casual Dining Group’s franchise aspirations boosted by UK hotel F&B deal

May 24, 2018

Casual Dining Group (CDG) has signed agreements to operate the food and beverage programmes at two UK hotels in what is a signal of its intent to grow its franchise portfolio.

The deals, which are both with London Town Group (LTG), will see CDG create and operate a bespoke premium offering at the Hotel Indigo, London Paddington, as well as introduce a Bella Italia at the newly-built Holiday Inn, in Wigstone.

CDG has also signed separate management contracts to look after operations at both sites.

Under the first deal, CDG has created a white label premium offering for Hotel Indigo’s London Street Brasserie restaurant, which will retain its name when reopened. The restaurant is set to reopen after refurbishment, with new staff and menus.

In addition to the restaurant, CDG will also look after the hotel’s bar, and conference and banqueting needs.

The second franchise deal is for a site at the newly-built Holiday Inn, in Wigston, Leicester, which will include a brand-new Bella Italia restaurant. Construction started earlier this month, with plans to open early June.

Koolesh Shah, managing director of London Town Group, said putting together a competitive food and drink offer that challenges the high street presents a great opportunity for the business to drive revenue.

“A one-size-fits-all policy doesn’t always work, you need to be flexible in your approach and tailor the offer to suit the specific demographics. CDG has been invaluable in helping us with this process, they have a suite of high street brands, but also the capacity to put together bespoke premium offers and we look forward to working closely together in future.”

Casual Dining Group is one of the largest independent midmarket restaurant operators in the UK, with nearly 300 sites located across the country. It operates primarily under the Bella Italia, Café Rouge, Las Iguanas and La Tasca formats in the UK, although also operates restaurants that trade under the brands of Belgo, La Salle, Huxley and Oriel. It also has restaurants in Asia, Africa, Europe and the Middle East, which operate under franchise.

Earlier this year the company said that its international franchising platform was showing good momentum, with 83 agreements signed, principally in the Middle East, Ireland and South Africa. A further 17 overseas franchise deals are planned for this year.

Mark Nelson, managing director of concessions and franchising at Casual Dining Group, commented: “We’re a very diverse business with a range of specialist skills that have been honed over decades operating high street restaurants. Calling on this knowledge, we have taken our key learnings and offered help to adjacent industries like the hotel trade, with putting together a food and beverage offer that absolutely drives sales. Matching the right offer, with the right demographic is imperative to success and these two deals, at differing ends of the market, clearly demonstrate the range of our capabilities.”

Source: Foodservice Equipment Journal

Fresh East Coast agreement with Virgin and Stagecoach would be ‘real scandal’

May 17, 2018

It will be a “real scandal” if Virgin and Stagecoach continue running train services on the East Coast Main Line after their franchise agreement is terminated, Lord Adonis has said.

The Labour peer said the firms are already being given a “bailout” with the Government ending the £3.3 billion contract to operate services between London and Edinburgh early.

Transport Secretary Chris Grayling previously said he would either put the franchise into public control through an operator of last resort – a consortium led by Arup – or negotiate a short-term deal with the incumbent.

(PA Graphics)
(PA Graphics)

The Financial Times reported that a decision is expected before the end of the week.

In November 2014, Virgin Trains East Coast – a joint venture between Stagecoach (90%) and Virgin (10%) – was awarded the franchise to run trains for eight years.

Stagecoach reported losses on the line and in November last year Mr Grayling announced that the franchise would be terminated in 2020 to enable it to become a public-private railway.

Two months later Mr Grayling told the Commons the franchise would only be able to continue in its current form for a “very small number of months” as Stagecoach had “got its numbers wrong” and “overbid”.

He said the firms would only be allowed to continue running services on a “not-for-profit basis”, with any financial rewards being performance-related and delivered at the end of a new contract.

Network Rail launches digital rail strategy
Chris Grayling said Stagecoach had ‘got its numbers wrong’ (Danny Lawson/PA)

Mr Grayling added: “There is no question of anyone receiving a bailout.

“Stagecoach will be held to all of its contractual obligations in full.”

Lord Adonis, who resigned as chairman of the National Infrastructure Commission following the announcement, claimed a new agreement with the companies would be a “huge bailout by another name”.

He said: “Don’t fall for (the) words ‘not for profit’. Virgin and Stagecoach will do very nicely out of this ‘not for profit’ contract.

“It is a real scandal if they get it, since they have just been given a £2 billion bailout from their previous contract.”

Stagecoach chief executive Martin Griffiths told the Commons Public Accounts Committee the collapse of the franchise was a “very painful experience”.

He said Stagecoach will lose more than £200 million over the course of the franchise, including forfeiting a £165 million guarantee.

Virgin and Stagecoach have managed reverse alchemy

Aslef union leader Mick Whelan

Virgin Trains East Coast is the third private operator to fail to complete the full length of a contract to run services on the route.

GNER was stripped of the route in 2007 after its parent company suffered financial difficulties, while National Express withdrew in 2009. Services were run by the Department for Transport (DfT) for six years up to 2015.

Mick Whelan, general secretary of train drivers’ union Aslef, said: “This is the third time in 10 years that a private company has mucked up the East Coast Main Line. In contrast, when it was run in the public sector, it returned £1 billion to the Treasury.

“That shows what we have been saying all along – that Britain’s railways should be run, successfully, as a public service, not for private profit. Because they can’t do it.

“Virgin and Stagecoach have managed reverse alchemy – by turning gold into base metal, and profits into losses on the East Coast.”

The Department for Transport would not confirm when the decision on the future of the franchise will be announced.

Source: BT.com

Industry Consolidation Reflected in New Franchise Agreements

April 18, 2018

This is the time of year when the branded hotel operating companies that sell franchises (Franchisors) start to use the new 2018 forms of franchise agreements.

As the hospitality industry has continued to consolidate, it should come as no surprise that some of the larger brands have modified their treatment of things such as group services contributions, marketing costs, and other expenses that apply across the brand or group of brands and impact every hotel within the specific system of hotels.

For example, some separate contributions made by a franchisee will now be an element of a larger bucket of contributions, giving the Franchisor a single payment through which to allocate different amounts for a number of services delivered by the Franchisor across the system that might have previously been paid for by franchisees separately.

This modification in approach has not altered the fact that the Franchisor may make changes to how the funds are used, merge a number of separate funds, or discontinue certain services, so long as it does so for all system hotels. The overall philosophy of treating similarly situated hotels within the brand system of hotels in a similar manner has not changed. It is also worth noting that the provisions of the franchise agreement with respect to liquidated damages and remedies may have been modified.

Providing for the payment of liquidated damages is a standard element of hotel franchise agreements. The calculation generally involves determining the average monthly amount of all franchise fees under the agreement, multiplied by the lesser of a certain number of months or the number of months remaining in the term or some percentage of the number of months remaining in the term.

The franchise agreement is expected to say that it is difficult to calculate franchisor’s damages over the remainder of the term and the liquidated damages represent a reasonable estimate of fair compensation for the damages that Franchisor would incur, and are not a penalty. Some of the newer franchise agreements may, in one way or another, leave the door open for Franchisors to seek damages against franchisees in addition to the liquidated damages, relating to other matters and not compensation for franchise fees.

Arguably, a Franchisor would have this right anyway if a franchisee had acted in a manner to besmirch the intellectual property and reputation of the Franchisor or fail to discharge any post-termination obligations.

Nevertheless, there is often now an affirmative reservation of rights in favor of the Franchisor to seek other remedies available under applicable law, beyond the pre-negotiated liquidated damages stated in the franchise agreement. Under any analysis, a review of the new franchise agreements would be wise.

Source: Lexology

Franchisors’ assistance obligation is exclusively technical and commercial, not financial

April 11, 2018

As a key component of any franchise agreement, the franchisor must assist the franchisee. Franchisors assist franchisees in various fields, such as marketing, management, operations, human resources and accounting. This assistance is usually provided through training sessions, hotlines and operational manuals. In a December 20 2017 decision, the Paris Court of Appeal held that this assistance obligation is exclusively technical and commercial and constitutes purely a ‘best efforts’ obligation (obligation de moyens). The existence of financial difficulties for the franchisee does not per se mean that the franchisor has failed to fulfil its assistance obligation.

Facts

A franchise agreement had been entered into between two French companies in relation to a sushi and Japanese food restaurant in the south of France. About two years later, the franchisee informed its franchisor that it was facing financial difficulties and asked for assistance.

A few months later, the franchisor sent its franchisee a formal notice to pay outstanding royalties. Then, to justify the suspension of the payment of the royalties, the franchisee alleged that the franchisor had failed to comply with its obligation to provide assistance and training. It eventually ceased operating the restaurant.

The franchisor filed suit against the franchisee to get payment of the outstanding franchise fees, plus damages for early termination of the franchise agreement and breach of the non-compete clause.

On November 15 2013 the Paris Commercial Court held that the franchisee was exclusively responsible for the termination of the franchise agreement and ordered the franchisee to pay outstanding invoices to the franchisor. The franchisee, which had become bankrupt in the meantime, lodged an appeal against this decision.

Decision

On December 20 2017 the Paris Court of Appeal confirmed that the franchisee was exclusively responsible for the termination of the franchise agreement. The court considered that the franchisee had failed to demonstrate that the franchisor had not fulfilled its assistance obligation:

If during the term of the contract, the franchisor must provide assistance, the latter is exclusively technical and commercial and constitutes only a best efforts obligation. The franchisee is an independent entrepreneur, who is sole responsible for the operation of its business. The franchisor’s defaults cannot be deduced from the only fact that the franchisee faces financial difficulties.

In particular, the court considered that the insufficient margin made by the franchisee was not enough to argue a contractual breach attributable to the franchisor; nor could it justify the suspension of the payment of royalties by the franchisee. According to the court, only “a serious non-performance of contractual obligations of the franchisor can justify that the franchisor be held responsible for the termination of the franchise agreement”.

Comment

The French courts often address the issue of whether a franchisor has properly fulfilled its assistance obligation. This decision confirms that franchisors, which have an assistance obligation, need not provide financial assistance to their franchisees. It has been held that the franchisor has no obligation to financially assist the franchisee (eg, through a temporary waiver of royalties), even if the franchisee faces cash-flow problems. This assistance obligation consists only of helping the franchisee to operate the business from a commercial and technical standpoint.

This decision clearly states that this is an obligation of best efforts. In other words, the franchisor may not guarantee that this assistance will result in the franchisor’s business succeeding.

This decision also makes clear that any default in the franchisor’s duties alleged by the franchisee must be proved based on the circumstances and facts of each case. It cannot be inferred from the fact that the franchisee’s business was unsuccessful.

Source: International Law Office

Nottingham optician eyes national expansion

March 27, 2018

The owner a branch of opticians based on Friar Lane in Nottingham has announced the rebranding of his now independent business and has revealed big plans for the future.

Indy Atwal, owner of the former Nottingham CrossEyes, now known as Loxley Opticians & Eyewear Experts, exited his franchise agreement with CrossEyes with the support of local law firm Fraser Brown. In total, six franchisees recently chose to exit the franchise, resulting in CrossEyes closing its UK operation.

Now that Loxley Opticians & Eyewear Experts has rebranded and become an independent business, Atwal’s long-term plans involve building the company into a national brand bringing jobs and investment to the local area.

Loxley Opticians & Eyewear Experts is unlike other opticians and provides a relaxed environment where its customers are able to choose from a large variety of frames from independent designers.

Atwal said: “The CrossEyes chapter was a huge learning curve, but becoming an independent business has had a lot of fantastic benefits, including having the ability to change and adapt in ways that large companies often find difficult.

“Nottingham is the perfect city for independent businesses as there’s a lot of great support from both the Council and other business owners. We have ambitious plans to make Loxley Opticians & Eyewear Experts a well-known and established brand in the UK and I look forward to seeing the new business grow from strength to strength.

“When I first made the decision to open my own store, the Fraser Brown team helped me through the process of setting it up, and again now that I have changed to an independent business they helped me every step of the way. I think it’s so important to have knowledgeable and experienced people behind you when going through changes like this, and I couldn’t recommend Fraser Brown enough.”

Loxley Opticians & Eyewear Experts, which has three members of staff, was given its new name as a nod towards Nottingham’s heritage due to its location and proximity to Nottingham Castle and the Robin Hood statue.

Fiona Boswell, head of franchising and commercial services at Fraser Brown, advised Indy on securing a release of his franchise.

She said: “Indy is very passionate and dedicated about what he does and has a clear vision of what he wants to offer. It has taken a great deal of work to get the company rebranded, but it looks fantastic and will be very well received in Nottingham.

“Indy is in a good position to run his own successful and independent business and I look forward to seeing the business grow. I’d like to wish him the best of luck in his new business venture.”

Source: The Business Desk

EasyHotel signs Spanish hotel franchise deal with Continuum

March 26, 2018

Budget accommodation company EasyHotel has signed an agreement with Continuum Hospitality Group to develop a 146-room hotel in Malaga, Spain.

Expected to open in 2019, the property will be EasyHotel’s second development in the country, with its Barcelona property due to open this summer.

A subsidiary of EasyGroup, the UK firm behind the EasyJet airline, EasyHotel owns seven hotels with a total of 702 rooms.

On top of this, it has a further 20 franchised hotels with 1,728 rooms.

The latest addition to its portfolio will be developed and managed by Continuum Hospital Group. It is backed by French private equity firm Extendam.

Malaga is officially the fastest growing urban tourist destination in Spain, hosting more than 1.3mn tourists last year according to the local town hall.

“We continue to expand our franchise portfolio in key international destinations and I am delighted that we are strengthening our presence in both of these important European tourist resorts, working alongside highly experienced partners,” said Chief Executive Guy Parsons.

“These additions will take our franchise portfolio to 1,728 rooms opened with 1,857 under development and the Board looks forward to announcing further opportunities in due course.”

Source: FDF World

Worldwide: A Global Analysis Of Franchise Agreement

March 25, 2018

Do you wish to establish an attractive business model to distribute goods and services globally? Does your company have a brand image in the market and hopes to expand? Do you have a unique trend and wish to generate profits? If there is an affirmative answer to any of the questions as mentioned earlier, then franchising is the best option you can avail to earn worldwide popularity with a handful of resources and a large number of profits. With a booming international economy and changes in cross-border corporate transactions, entrepreneurs around the world are looking to establish their brands in foreign countries. If you are one of those entrepreneurs, this article will prove to be much more than a legal aspect of franchise agreements.

The business structure of major companies around the globe is rapidly transforming with a clear objective of expansion all over the world. The franchise is a unique method primarily used in service industries and a mechanism for transferring business structure via arm’s length with a handful of resources. It turns out to be a manifestation for exploiting collaboration between the commitment of franchisee and management expertise of franchisor. For a franchise model to survive the country requires a legal environment providing an organized framework to benefit all stakeholders, however, there is no unanimity in all nations concerning the legitimate model. Having a glance of history, we can see a discernible trend of regulation in significant jurisdictions post adaption of the franchise model, most of the countries are willing to change the legal environment for a franchise system to breathe. Whereas, some countries are still reluctant and rely merely on the underlying rules and regulations regulating the other business activities in general.

The franchising model has benefitted from the trend towards the globalization of markets henceforth; the new global panorama post adaption of franchise model is seen as an icon of western-based globalization. Now, considering the overall international standards in mind, this article focuses on the elements of franchising, the legal framework and its enforcement in the primary jurisdiction in the world.

UAE

UAE has the robust and dynamic markets in the world, and it is bursting with new foreign business arrangements, where franchises are bountiful. At present in UAE, franchises are operating in various sectors but mostly in fast foods, soft-drink bottling, beauty products, restaurants, and apparel. Franchise in UAE gets regulated with a range of civil and commercial laws depending upon the terms of the contract, as there is no specific franchising law in the country. There are multifarious laws which apply to franchise arrangements such as Federal Law Number 13 of 1981 (as amended) concerning Organization of Commercial AgenciesFederal Law Number 5 of 1985 on Civil TransactionsFederal Law Number 18 of 1993 on Commercial Transactions.

Apart from the aforementioned, UAE intellectual property laws for trademark, copyright, and patents, Federal Law Number 8 of 1980 on labor laws(as amended). However, the major challenge faced by UAE courts while treating a franchise as an agency is the arbitrability of the franchise dispute. Further, there are two types of franchise agreements that exist in the country, registered and unregistered, where the former contracts are those registered with the UAE Ministry of Economy and the latter are not. A dispute arising out of a certified franchise agreement provides exclusive jurisdiction to local courts under Commercial Agency Law, on the contrary, a dispute arising out of unregistered arrangement is not valid nor entertained in the court. The Agency law favors franchisees over franchisors and therefore international brands before coming to UAE must consider the need for registering the agreement. Registration could provide the ability for both franchisor and franchisee to prevent parallel trading of goods and has evidentiary value in the issue of trademark infringement. Further, the court faces several types of a dispute between parties, either from the registered or unregistered agreement, where termination of registered agency agreement is usually tricky, rest others include, misrepresentation, breach of contract, the appointment of another agent post-termination of contract.

Practically considerable amount of unregistered agreements exists, and courts on many occasions have entertained cases whereby applying substantive provisions of Federal Law Number 18 of 1993 concerning the Commercial Transactions. Under the registered agreements, the law provides higher protection to the ‘franchisees’, referring to Article 8 of the Commercial Agency law, where the Principal can only terminate the agreement on the Justifiable cause, whereas, under unregistered contracts, the deal gets treated as a contract.

The United Kingdom

In 1960, Dyno-rod was the first franchise network launched in the UK since then, franchising has framed its roots and flourished as a proven method for expanding business in the market. British Franchising Association (BFA) regulates franchise system in the country by its codes and ethics due to the absence of specific franchise laws. Subsequently, BFA code only applies to BFA members but UK High Court changed its opinion overtime in Re Drivetime Recruitment Ltd Re DST Ltd.1, a case where winding up of a franchise whose franchisor was not a member of BFA, the court recognized the significance of BFA code while analyzing the behavior of franchisors in general. Further, BFA code imposes obligations on both parties and does not explicitly favors one.

Apart from the BFA code, the U.K. Competition Act of 1968 regulates all kinds of agreements in the country inclusive of franchise agreements. However, the primary concern among the franchisors is the prohibition from entering into contracts imposed by the Competition Act itself. Primarily, franchisors are prohibited from entering into agreements with an objective of distortion and prevention of Competition Act; secondly, any agreement exempted under European Union (EU) law and exempted under UK law. EU rules apply in the UK per Article 101 of the act, where European Commission has issued a block exemption for vertical agreements that have the effect of exempting specific rules and regulations if it satisfies particular criteria.

Although no specific franchise law exists in the country, there is particular other legislation which the courts refer while assessing the dispute between franchisors and franchise being, Trading Scheme Act, 1996, Data Protection Act of 1998, Unfair Contract Term Act 1977 and The Bribery Act 2010.Court entertain several kinds of issues between the parties which includes, enforcement of post-termination non-compete covenants, breach of contract, misrepresentation and more.

The United States

The Leader of Global Franchising Industry and the icon for most countries franchise system is still holding the same position in the global market. Franchising in the U.S. is regulated either by federal laws or state laws. The Federal Franchise Rule implemented by U.S. Federal Trade Commission (FTC) applies all over the country, and the latter are various state laws apply only to specific events where a sale of a franchise was made in the state, business located in the state or franchisee resides in the state.

Apart from the primary law, there are three general categories of statutes regulating franchise in the country being disclosure law, registration laws, and related laws. These three categories prevent the most common types of violations under franchise agreement such as offering and selling of unregistered franchise, failing to make required disclosures, making misrepresentations in the contract and improper terminating of agreements. The federal Franchise rule does not provide a specific provision for registration of franchise; however, various states require that franchises must be registered before offered in the market. Subsequently, state laws also impose various other restrictions on franchise relations including, Good faith and reasonableness, marketing fees, non-waiver, encroachment, etc.

The eBay Inc. v. MercExchange LLC happens to be one of the significant cases in the history of franchising in the United States. The case addresses the post-termination enforcement of trademarks rights, the court opined in favor of franchisor’s right for terminating the use of trademarks post-completion of agreement and court may pass preliminary injunctions for preventing the usage of the same.

India

Franchise sector in India is at a nascent stage. Somewhat similar to most other countries there are no specific regulations that regulate the franchise law in the Indian sub-continent. Franchise agreements are therefore contractual and governed by various other statues and legislations which determine the type of relationship between the franchisor and franchisee. For instance, Indian Contract Act 1872Monopolies and Restrictive Trade Practice Act 1969Competition Act 2000Transfer of Property Act 1882, Consumer Protection Act 1986, Intellectual Property Laws, Indian Taxation Act 1961 and Foreign Exchange Management Act 1999. Additionally, it is pertinent for the investor before entering the Indian market that any proposed investment must abide by the rules of FDI policy released semi-annually by Department of Industrial Policy and Promotion (the DIPP).

The franchisors and franchisees intend to create a contractual relation, however, sometimes the relationship between the party could be considered an agency if the franchisee is allowed to enter into contracts with the third party. Further, issues relating to franchise agreements may include termination of contract, misrepresentation, breach of contract and more. However, the court does not address the issue of adverse covenant post-termination, per section 27 of the Contract Act such post-termination negative covenant is void-ab-initio. Additionally, the court does not favor either party, as the relationship between franchisor and franchisee are contractual, however, about the principal-agent relationship, the law is more favorable towards the agent.

The Apex court has always tried its level best to resolve the dispute with utmost care. Subsequently, Supreme court of India in Gujarat Bottling Co. Ltd. v. Coca-Cola Co. Ltd.2 emphasized on an essential aspect of a franchise agreement, the disclosure of know-how and trade secrets to the franchisee. The court was of the opinion that franchisee must take adequate steps to protect the franchisor’s confidentiality from other businesses in the markets and franchisor has the right to impose a negative covenant for prevention of disclosure of trade secrets in the market.

Saudi Arabia

Kingdom of Saudi Arabia is open for franchise agreements with few legal restrictions. Saudi law does not create a distinction between foreign franchisor or franchisee and Saudi franchisor. The country does not have a specific franchise law. However, Ministerial Order Number 1012 of 17/09/1412 (corresponding to 22 March 1992), issued by Ministry of Commerce and Industry, brought franchising under the similar purview of commercial agency regulations. The commercial agency regulations set out the rules which govern the relationship between the principal (franchisor) and agent (franchisee). Further, like UAE there are two types of agreement exist in the country registered and unregistered, where the former is the one registered in the Commercial Agencies Register at MOCI(Ministry of Commerce and Industry) within six months, and latter is the one which is not. Additionally, entities failing to register the agreements can still enforce franchise agreements but, will not avail the protection under Agency law.

Now, considering the mandatory provisions, the Sharia law will apply to all franchise agreements and parties are at autonomy to structure the contract. The law deals with issues like termination where the contract will be terminated per the terms, and there is no minimum term for a franchise agreement. Restrictive covenants are lawfully enforceable in the Kingdom where the franchisor has the right to restrict a franchisee from competing with the franchisor, dispute resolution, autonomy of party to stipulate the dispute resolution mechanism and where parties have not opted for arbitration the matter will be resolved by the court having jurisdiction.

Conclusion

With the wave of globalization having hit business structure of major companies around the globe, franchising seems to be an attractive and lucrative option for foreign brands to expand globally. The future of franchising is bright and clear; however, it is recommended to consult a lawyer before entering into franchise agreements due to dissimilarities of laws in countries.

Source: Mondaq

Is it time for you to review and update your franchise agreement?

March 20, 2018

What you need to know about how often you should review your franchise agreement.

Your franchise agreement is now two years old, or five or even ten years old … or is even older than that.

When and how often does it need to be reviewed and updated?

While there is no specific rule, the following are some of the key moments when you should read your agreement over carefully and make the necessary changes to ensure that it is still relevant and continues to provide proper protection for your rights:

  1. When adding, removing or making changes to the services you provide to your franchisees, or the manner in which you provide them;
  2. When any significant change is made to the services or products offered by your network;
  3. When any significant technological change occurs or is anticipated in your network (in particular, relating to the website, ecommerce, and your social media presence);
  4. When there is any change in the legislation or regulations governing your or your franchisees’ business (and your franchise lawyer should keep you informed about this);
  5. When any change is made to your names, brand names, trademarks, logos or slogans;
  6. When any situation arises where your agreement does not seem to provide an adequate answer;
  7. When a disagreement or dispute arises with a franchisee concerning the interpretation or application of your agreement. However, it is wise to consult your franchise lawyer before making any change as a result of a disagreement or dispute with a franchisee, since it can be preferable to wait until the disagreement is resolved or the dispute is over before making any change to your agreement; and
  8. When a judgment is rendered and could have an impact on your agreement or your relations with your franchisees (and your franchise lawyer should also keep you informed about this).

Even apart from those circumstances, you should read your agreement over carefully at least once every two or three years, and also have your franchise lawyer read it over.

Three practical tips

  1.  It is important that you read over your agreement yourselves from time to time. This is necessary to ensure that the clauses still properly reflect the way you do things, your procedures and rules in effect (which your franchise lawyer cannot know);
  2. If you are having problems properly understanding a clause in your own agreement, you should probably review it with your franchise lawyer. If it is not clear to you, it will be even less clear to a franchisee and the franchisee’s legal advisor … or, even worse, to a judge;
  3. One of the major benefits of dealing with a lawyer for whom franchising is a significant component of his or her professional practice is that the lawyer will be able to keep you promptly informed about developments in the legislation, regulations and case law that may have an impact on your franchise agreement or on your rights, responsibilities and obligations. These developments might not come to the attention of lawyers for whom franchising does not account for a significant share of their practice.

Source: Lexology