A franchise is an agreement whereby the franchisee is given permission against a fee to sell a product or service in accordance with the franchisor’s techniques and structure and under the franchisor’s brand. There is no specific law in Malta dealing with franchising, leaving the matter to be regulated by general intellectual property laws (in relation to the brand elements) and by contract law (in relation to the terms and conditions of the contract). It is therefore imperative for the franchise agreement to be very tight and comprehensive, to ensure that it gives effect to the full intention of the parties, without ambiguity. Registration of a franchise agreement is not required in Malta.
As with any type of contract, the versions which a franchising agreement can take are various as the parties are free to agree to any terms, provided that they are legal. However, franchising agreements tend to fall into one of the following categories:
- Single Unit Franchise Agreement which permits the franchisee to open one outlet or establishment in a single location;
- Area Franchise Agreement which permits the franchisee to open a number of outlets or establishments within a specified area or location;
- the master franchise agreement which permits the franchisee to become a sub-franchisor, thus reselling the franchise.
A franchise agreement is not merely a trademark licence but rather a license to use the franchisor’s brand and methodology, thus various details of the working relationship need to form part of the contract. A franchise manual should also supplement the main franchise agreement and should contain all the procedures pertaining to the operation of the franchise, with the franchisee being bound to observe this manual as an integral part of the contract. The franchise arrangement generally comprises training as well as mandating specifications for the outlet or establishment that is to be used, and the level of service that must be provided. Due to the fact that the franchisee is normally investing heavily into the franchise, the franchisor would be bound to maintain a continuing interest in the franchisee’s business, including the regular provision of know-how, training and assistance.
The franchise agreement should, as a minimum, consider all of the following matters:
· Grant clause: the agreement must very clearly specify exactly what kind of permission is being granted, whether it is for a single unit or for an area, whether the franchisee is exclusive within a given area, what the franchisee can and cannot do.
· Payment clause: the payments which the franchisee owes to the franchisor must be clearly specified and these normally comprise an upfront lump sum payment or ‘franchise fee’ (which tends to represent the ‘goodwill’ as well as costs of training and other initial investment) and an ongoing ‘licence fee’ (which can be a fixed amount payable every so often or a percentage of turnover).
· Provision of information by the franchisor: the franchisor must be bound to disclose the franchise system, know-how, strategies and procedures to the franchisee at the start of the relationship.
- Provision of assistance by the franchisor: it is essential for the franchise agreement to oblige the franchisor to provide assistance to the franchisee, both at the start of the relationship and thereafter; assistance can relate to the setting up of the outlet, training of franchisee, ongoing provision of information and know-how, ongoing assistance with problems and provision of guidance to franchisee.
- Performance standards: the franchisee should be bound to achieve set targets and to retain a specified standard when providing the franchised good or service; additionally, the franchisee should be bound to observe the procedures laid out by the franchise manual at all times. Inspection by the franchisor may also be included within the agreement.
- Advertising and promotion standards: the franchisor may consider setting minimum requirements for advertising and promotion, including regularity of promotion, minimum investment in advertising by the franchisee and quality control of adverts.
- Prohibition to transfer the rights under the franchise agreement: if the franchisor wants to prevent the franchisee from transferring or sub-licensing his rights, he must say so in the main agreement.
- Prohibition on competition: the franchisee will acquire a great deal of information in relation to the operations of the franchisor, therefore the franchisor may wish to contractually restrain the franchisee from competing with him by providing a similar good or service during the term of the agreement and for a specified period after termination.
- Confidentiality: the confidentiality clause operates hand-in-hand with the prohibition on competition clause and essentially prohibits the franchisee from using any confidential information or trade secrets obtained during the franchise relationship for any purpose other than that specified in the agreement. It is essential for ‘confidential information’ to be accurately defined.
· Termination: the agreement should contain details as to which party can terminate the franchise relationship under given circumstances and the consequences of such termination.
Equinox has extensive experience in advising clients who wish to enter into franchising agreements here in Malta. For legal advice or additional information relating to franchising, please contact firstname.lastname@example.org. For business advisory matters, business plans or feasibility studies, please contact email@example.com.