[Parole d’expert] Elodie Bertrand-Esquel, partner at Beside Avocats, offers an overview of the main clauses to be found in a franchise agreement.
Although each agreement is different, sometimes even within the same network, franchise contracts are in fact based on common clauses. So it’s vital for prospective franchisees to understand what these clauses actually mean.
Duration clause
Franchise contracts generally run for five or seven years, to enable the franchisee to recoup his or her investment. During this period, the franchisor must allow the franchisee to exploit his or her concept, passing on up-to-date know-how and rights to distinctive signs. Generally speaking, situations in which the parties can terminate the contract are stipulated: in the event of misconduct or by mutual agreement, for example.
Franchise contracts are not generally renewable: at the end of the agreed term, the contract is not renewed.
This clause also determines the conditions under which the agreement will be terminated, and the resulting consequences: return of communicated elements, confidentiality obligation, payment of penalties, post-contractual non-competition obligation, etc.
It is not uncommon for the franchisee to be liable for compensation from the franchisor in the event of termination, in the amount that the franchisor should have received for the remaining term of the agreement.
Exclusivity clause
The franchisor’s commitment to reserve a territorial zone for the franchisee is not a mandatory element of the contract, but is very frequently found.
However, this clause is subject to certain conditions of validity, failing which it could be illegal.
It is therefore essential to seek the advice of a specialized lawyer.
Even without a specific clause in the contract, the franchisor is obliged to enforce the exclusivity granted by his other partners.
Under this clause, the head of the network can prohibit the franchisee from setting up a sales outlet in a reserved territory, from advertising or running promotions there, from canvassing customers there, from including a banner on its website referring to this exclusive area, or from paying a search engine or online advertising space provider to broadcast advertising specifically to users established in this location.
On the other hand, he cannot forbid his partner to contract with a person who contacts him spontaneously, even if the latter is domiciled in the reserved territory of another franchisee, or to sell products online, via his website.
The applicant must therefore ensure that the exclusivity granted is sufficiently defined, as is the territory of exclusivity.
He must also ensure that indirect sales, for example via the Internet, are not unjustifiably restricted.
Financial considerations
The franchisee must pay a number of financial considerations: the entry fee, the royalty and other obligations (training, IT and communication tools, fitting-out, etc.).
Royalties can be of various kinds (know-how, assistance, brand or trade name) and are generally calculated on the basis of the franchisee’s annual sales.
In the event of late payment, the franchisor may impose penalties for late payment, suspend performance of the contract (including supply), terminate it or withdraw exclusivity.
It should be noted that the company is not obliged to charge an entry fee, or even to refund it if the franchisee withdraws from the contract.
However, if the contract is renewed, a new entry fee may be charged.
It is therefore important to ensure that the amounts of these compensations are specified and justified.
Payment terms must comply with legal requirements and be balanced.
It is in the candidate’s interest that the penalties provided for under this provision are limited, so that late payment does not have too serious consequences.
Penalty clause
It guarantees compliance with the commitments made by the franchisee.
This financial penalty is imposed in the event of a breach of a contractual obligation.
Applicants must ensure that the wording of this clause is sufficiently precise.
The agreement must list the obligations and breaches whose non-performance will trigger the application of the penalty.
It is also necessary to check that the amount is limited and not unbalanced in relation to that of the contract.
In some cases, this penalty is not exclusive of any other remedy, i.e. the network head may receive financial compensation and reserve the right to take legal action or terminate the contract.
Contractual and post-contractual non-competition clauses
It prohibits the franchisee, for the duration of the contract (contractual) or after its expiry or termination (post-contractual), from carrying on any activity in competition with that of the franchisor.
The franchisor may define “competing activity” and thus extend the prohibition to closely related fields.
It may also stipulate consequences in the event of non-compliance: heavy penalty, termination, etc.
The candidate must therefore check whether the rule applies during and/or after the contract, and which activities will be prohibited.
It is also in the candidate’s interest to ensure that the post-contract non-competition clause complies with strict legal conditions.
These provisions are so important that a review by a lawyer is essential.
Contractual and post-contractual non-reaffiliation clauses
This rule prohibits the franchisee, for the duration of the contract (contractual) or after its expiry or termination (post-contractual), from joining a network that is not that of the franchisor, who may then impose consequences in the event of breach.
As with the non-competition clause, the candidate must check whether it applies during and/or after the contract, and whether it complies with the legal conditions in force.
A lawyer’s review is essential.
Intuitu personae clause
It means that the agreement has been concluded in consideration of the franchisee, and is therefore attached to the franchisee, preventing any transfer to another, except with the written agreement of the network head.
In the event of refusal, the entrepreneur must continue to operate the concept for the duration of the contract.
The purpose of this rule is to protect the franchisor’s know-how.
These clauses are often accompanied by approval and pre-emption clauses.
The former stipulate that the franchisor has the right to authorize or refuse the transfer of the agreement.
Approval is often subject to a procedure that sets a deadline for the network head to respond.
In certain cases, the franchisor can refuse a proposed transfer without having to give reasons for this refusal.
Pre-emption gives the company priority to buy back the seller’s shares and/or business assets, at the price offered to the third party.
The candidate must therefore determine his transfer rights.
Otherwise, he will not be able to sell his business or the rights to his company without the franchisor’s agreement.
It is also in the candidate’s interest to determine the conditions under which the franchisor may or may not authorize a transfer (approval clause), and whether it may itself acquire the rights on a priority basis (pre-emption clause).
