The Importance of a Well Drafted Franchise Agreement

In Florida, there isn’t a specific statute that governs how a Franchise Agreement must be drafted. As a result, many unlawful acts and practices prompted the Florida Legislature in 1971 to enact The Florida Franchise Misrepresentation Act. However, The Act only offers limited legal recourse for victims of fraud and misrepresentation.

This blog article identifies some of the common material provisions which draw concern when drafting a franchise agreement. The art in drafting provisions is viewed as a strategy to limit exposure to fraud and misrepresentation and may possibly save future litigation expense.

A franchise agreement generally will establish the relationship between the party granting the rights to its franchise, called the franchisor, and a party granted the rights to the franchise, called the franchisee.

Before a franchise agreement is drafted, consult with an experienced corporate attorney. The attorney will first become familiar with the franchise’s day-to-day operations, sales, marketing, advertising, and all other relevant aspects of the business. This groundwork will later determine what language the lawyer will choose to incorporate into the material provisions of the agreement.

The material provisions that require cautious contract drafting are as follows: The Nature of Franchise; The Franchise Territory; The Terms of Agreement; Duties of the Franchisor; Franchise Fees; Duties of Franchisee; License of Intellectual Properties; Accounting and Record Keeping; Advertising by Franchisee; Insurance; Transfer of Franchisee’s Interest; Termination; Non-competition.

(This article provides only a limited discussion on the types of provisions)

The Nature of the Franchise specifies the franchisor’s “ready-made program” to the franchisee. The type of business to be conducted should be specified. The agreement must be clear in what the franchisor is granting to the franchisee.

The Franchise Territory identifies the geographic location the franchisor is granting to the Franchisee the right to use his franchise license. This territory may not be exclusive which is why the scope of the geographic location and the franchisor’s right to operate multiple franchise locations within a given territory should be clearly stated. A map of the franchised territory may be attached as an exhibit to the agreement, with the boundary lines of the territory clearly marked.

The Terms of Agreement states whether the franchise is for a limited number of years. If an agreement does not specify a period for the duration, then a trial court may properly impose reasonable term as to the term of the agreement. Furthermore, if the franchise agreement is not renewed at the end of the term, the franchisee would be deemed to be operating on a month-to-month basis until the franchisee terminates the relationship in a written letter sent to the franchisor.

The Duties of the Franchisor are almost non-existing in Florida, unless explicitly stated in the agreement. An agreement must explicitly state the training, consulting, and ongoing support services that will be provided by a franchisor. A franchisor may be liable for the acts of the franchisee under the theories of negligence, strict liability, and vicarious liability.  

Generally four types of Franchise Fees exist: (1) an initial fee for the rights to use intellectual property of the franchise; (2) an ongoing fee, usually monthly or quarter and generally structured as a percentage of gross-sales; (3) a service payment for the goods and/or services provided by the franchisor; and (4) a periodic contribution to an advertising account held by the franchisor for the benefit of all of the franchises.

The Duty of the Franchisee consists of, but is not limited to, the maintenance of the quality standards developed by the franchisor and the uniformity of the products and/or services. The franchisor requires the franchisee to adhere strictly to the “ready-made program” developed and will include a covenant that requires the franchisee to purchase all supplies and inventory from the franchisor. Any deviations from protocol should require special authorization from the franchisor.

The Intellectual Property License specifies the franchisee’s right to use the franchisor’s propriety trademarks and other logos or symbols. The scope should be clearly specified and limited by the enumerated rights given to the franchisee. This provision is coupled with a confidentiality provision ensuring that the franchisee does not disclose the franchisor’s trade secrets or other confidential information.

The Accounting and Recordkeeping identifies which party will be responsible for the franchise’s accounting; generally it will be maintained by the franchisee and the provision gives the franchisor the authority to review the records at any point in time.

The Advertising by the Franchisee defines the scope of the franchisee’s ability to tailor local advertising to local market conditions. This advertising expense is separate from the advertising fee managed by the franchisor.

An Insurance Policy is generally not provided by the franchisor. Franchisees are independent contractors and not subsidiaries or employees of the franchisor. Thus, property/casualty, liability, workers’ compensation, and any other coverage should be maintained independently by the franchisee.

The Transfer of Franchisee’s Interest generally prohibits the franchisee from transferring the franchise to a third party without the franchisors consent. The transfer is usually conditioned on the franchisor’s evaluation and approval of the substitute franchisee.

The Termination Clause limits circumstances which the franchisor can unilaterally terminate the franchise agreement. Florida Statute §686.413 requires the franchisor to have due cause before terminating an agreement. In addition, the franchisor must provide written notice and wait a period of 180 days before the effect of the termination. During this period either party may petition a court to limit or extend the period based on the merits of the case.

The Non-Compete provision requires the franchisee to agree not to compete with the franchisor for a significant period of time after the franchise agreement has been terminated. This covenant is subject to state statutes affecting the validity and enforceability.

If you need to consult an experienced contract drafting attorney regarding franchise agreements in Miami-Dade, Broward, Monroe, Collier or Lee County Florida, schedule a consultation with the experienced attorneys at EPGDLaw today, located in beautiful Coral Gables. Call us at (786) 837-6787 or e-mail us to schedule a consultation.

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