16th Apr 2013
The first part of “Dissecting a Franchise Agreement” dwelled on the subject matter of the franchise agreement, namely, the business format being franchised. Since a franchise agreement is usually a lengthy document, it is best that the agreement be broken down into its basic elements, to allow prospective franchisors and franchisees to understand its bare essentials.
Like any other contract, a franchise agreement involves three essential elements, namely, consent, subject matter, and cause or consideration. One of the aspects of “consent” involved in a franchise agreement is the consent of the franchisor, represented by his signature in the franchise agreement. By virtue of this consent, the franchisee is allowed by the franchisor to use his trademarks and proprietary marks subject of the agreement, the operations manual/s and materials referred to, used, or issued in the course of the agreement, and the know-how, trade secrets, and information learned by the franchisee during the conduct of the franchise agreement.
It must be noted that the franchisor, even after a franchise agreement is signed, remains the owner of the franchise. Thus, after the term of the franchise agreement expires and no renewal is granted to the franchisee, a good franchise agreement should prevent the franchisee from operating, engaging, or participating in any capacity, whether as owner, stockholder, officer, independent contract, or employee, in any business which is similar to, or stands to compete with the franchisor’s business.
In fact, a good franchise agreement should be replete with legal remedies afforded to the franchisor to protect the latter in case the franchisee decides to contravene the provisions of the franchise agreement. If the franchisee should decide to operate a business similar to, or competing with, the franchisor’s business, the franchisor by virtue of the certain provisions in franchise agreement, should be able to immediately secure a temporary restraining order or injunction from our courts to restrain the former franchisee from continuing with his acts. This is because, at all times before, during, and after the term of the franchise agreement, the franchisor is explicitly recognized by the franchisee as the owner of the business format franchise. Thus, the signing of the franchise agreement does not alter the personality of the franchisor. He retains absolute control over the conduct of the franchise agreement and even after its expiration.
Likewise, the consent involved in a franchise agreement is that of the franchisee. Upon signing the franchise agreement, the franchisee has essentially agreed to the terms of the franchise agreement, including payment of the stipulated franchise fee, royalties, penalties and other assessments due to the franchisor from the franchisee. In addition to agreeing to the identity and personality of the franchisor under the agreement, the franchisee’s consent also includes his agreement to even drastic remedies afforded under the franchise agreement to the franchisor, including management take-overs, and summary grant of injunction.
While consent of the parties to a franchise agreement is exhibited through their respective signatures in the agreement, the parties are not without legal recourse, in the event that such consent was procured through fraud, mistake or duress. In such instances, the innocent party may file an action in court to have the contract rescinded or annulled.
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