Dissecting a Franchise Agreement: Part One

ISS 11900 05871

If you are interested in franchising, whether as a franchisor or a franchisee, an important document to consider is the franchise agreement. A franchise agreement is usually a voluminous document. Of course, it is not the intention of the franchisor to confuse the franchisee. It is lengthy because it specifies in detail what the respective duties, obligations, and prohibitions of the parties to the contract are. Despite its length, the parties must be aware of the stipulations and provisions in the franchise agreement.

A franchise agreement, like any other agreement, follows the three essential elements to a valid contract, namely, consent, subject matter, and cause or consideration. Understanding a franchise agreement by these three requisites will help the prospective franchisor or franchisee decide whether franchising is the right move for his or her business.

The subject matter of a franchise agreement is the business format being franchised. It is the right to use the concept, the franchisor’s manner and system of doing business, his trademarks, trade and industrial secrets such as the recipe to a secret menu, a special ingredient in a formulation, a precise manner of conducting affairs, and other proprietary know-how. Thus, the prospective franchisor or franchisee should not confuse a business format franchise from a legislative or government franchise.

A franchise essentially means the grant of a right. In business format franchising, the right is generally granted by an entrepreneur or private person. In a legislative or government franchise, the right is exclusively granted by the government. Examples of legislative franchises include telecommunications franchises, radio, cable, and television franchises granted by congress through the National Telecommunications Commission. They also include other public utilities and conveniences such as the provision of electricity, water, public transportation, courier and mail. Thus, in the event that a franchise agreement covers any activity regulated by law, the franchise agreement should be understood to mean that the subject matter of the agreement is limited only to the business format of the franchisor, and should not be understood as also including the right to engage in the particular business.

The franchisee must, by himself, secure the proper licenses and permits prior to engaging in the regulated activity. He cannot attribute his operations as a franchisee to the license granted by the government to the franchisor. He cannot claim that since his franchisor already secured the government permits, he is spared the task of doing so. The franchisee must get his own. Of course, given the experience and knowledge of the franchisor, the franchisee will expectedly have no trouble procuring the necessary permits from the required government agencies.

Good franchise agreements are usually explicit when it comes to the subject matter of the agreement. This is because a franchise agreement, being a contract of adhesion, is construed against the drafter, which in most cases is usually the franchisor. In the event that a provision in a franchise agreement is ambiguous, our Civil Code resolves the ambiguity always against franchisor. Furthermore, standard franchise agreements usually contain a clause on entirety of the agreement, stating that the franchise agreement contains all the clauses agreed to by the parties, and that matters and agreements not stated in the agreement are deemed superseded. Thus, if any particular stipulation is inadvertently left out by the franchisor, it is deemed to have been superseded.

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