Franchising agreements constitute a preferred business relationship in many sectors such as food and beverage, education, petroleum, tourism and logistics. Franchising agreements are framework agreements and may require the conclusion of more than one agreement between the franchisor and the franchisee, which give rise to mutual rights and obligations. In franchising agreements, the franchisor grants a kind of commercial privilege to the franchisee in return for a fee. This privilege includes the use of intellectual rights such as trademarks, patents, licenses, know-how, which are included in the franchisor's well-known business. Since the franchisee pays for this privilege, the franchisor thus generates income. The franchisee, on the other hand, does not have to establish a brand new business, but is included in an "established order", so to speak, and is involved in commercial life with less risk thanks to the reputation and trust created by the franchisor in the sector.
In this article, we have made explanations about how the franchising agreement, which is an important fact of commercial life, should be arranged. We have included an example of a franchising agreement at the end of our article by focusing on what the franchisee and franchisor should pay attention to while preparing the contract. It should be noted immediately that the sample contract is shared only to give an idea, and the franchising agreement should be arranged differently and specifically according to each sector and contract parties.
1. Rights and Obligations of the Parties in Franchising Agreements
In the franchise agreement, the franchisor is under the obligation to make available to the franchisee the intellectual property rights called intangible goods of an enterprise. Intellectual property rights refer to elements of economic value such as trademarks, patents, business names, know-how, trade know-how. The franchisor transfers the right to use these elements, which it owns and which have achieved a certain recognition and success in the sector, to the franchisee in return for a certain franchise participation fee and periodic "royalty" to be paid. The franchisor is also obliged to support and protect the franchisee. Training the personnel of the franchisee, supervising the personnel, determining the working conditions, determining the cleaning and service rules and sales prices are also among the rights and obligations of the franchisor. The franchisor is also obliged to provide the franchisee with the products and materials it needs.
The franchisee is obliged to do business in accordance with the rules and instructions given by the franchisor. In accordance with this contract, the franchisee is required to pay a certain fee to the franchisor. This fee, called franchise fee or royalty, is one of the essential elements of the contract. Apart from this, the franchisee has the obligation to report regularly to the franchisor and to endure its audits.
2. Reasons for Preferring Franchising System
There are many commercial advantages obtained by the parties in the franchising system. The franchise system, which is a good method for the franchisor to increase the geographical and quantitative spread of its business, is also preferred by the franchisee because it minimizes risks and provides convenience. For an entrepreneur who wants to start a business or a merchant who wants to establish a new business, establishing a brand new business, organizing it, establishing a certain reputation and creating a customer environment is a process that requires a lot of effort, effort and time. However, as a franchisee, starting a commercial venture by using the name and facilities of a well-known brand already in the sector promises to achieve successful results in a short time without requiring such great efforts. Moreover, the franchisee can benefit from the franchisor's professionalism in business life. Thus, they can access much more qualified services in legal and educational matters thanks to the franchisor.
3. Is it Necessary to Execute the Franchising Agreement in Writing?
Franchising agreements do not have to be concluded in any way in order to be validly established. Because franchising agreements are not regulated in any law in our legal system. Since there is no legal obligation, it is accepted in theory that a franchising agreement can be concluded even verbally between the parties. However, the existence of a written agreement becomes very important in order to prove the existence of the agreement in cases where the franchising agreement is collusive (fraudulent) between the parties or the agreement between the parties is not a franchising agreement but a distributorship agreement, or the agreement does not exist at all and there are allegations of infringement of the trademark right. As it is extremely useful in terms of proof, it is recommended that franchising agreements be made in writing, but franchising agreements containing trademark and patent licenses must be made in writing.
In practice, the lack of a written franchising agreement between the parties causes legal problems. One of the most common allegations is that the franchising agreement is collusive and its proof is an important issue. In the decisions of the Court of Cassation, the following determinations have been made on how to prove the franchising agreement in the absence of a written agreement between the parties;
In the concrete dispute, the plaintiff creditor claimed that the Franchising Agreement allegedly concluded between the defendant third party and the defendant debtor was collusive and relied on commercial books and records and expert examination.
Pursuant to Article 31 of the HMK, these issues should be clarified, as it is understood that the debtor company has submitted the Franchising Agreement, bonds, receipts and invoices issued by the debtor company on behalf of the third party company. Obtaining a report from an expert (taking into consideration that the opening and closing certifications have been made) to determine whether the contract, invoices and records regarding the payment are available in the commercial books of the debtor company and the defendant third party, While the report to be obtained should be evaluated together with the other evidence available in the file and it should be determined whether the Franchising Agreement allegedly concluded between the third party and the debtor is collusive as claimed by the plaintiff creditor and a decision should be made about the claim of appropriation according to the result, it is not correct to decide to dismiss the lawsuit in writing as a result of incomplete examination and research (Court of Cassation 8th Civil Chamber, 2018/15117 E., 2020/4343 K.)
As can be seen, a written agreement when establishing a franchise system provides great convenience in terms of proof and keeps the parties on a legally safe ground. Otherwise, it is extremely likely that disputes will arise in the future and the franchise system will be blocked. Below, we share an example of a franchising agreement to give an idea, although it has a simple form. We remind you that it is not suitable for use as a template, as its details and scope will vary according to each sector and contract parties.
EXAMPLE OF FRANCHISING AGREEMENT
1. PARTIES
Franchising agreements have two parties. The first of these is called the franchisor and the other is called the franchisee. In this section, the title, tax identification numbers, addresses of the parties should be written in the contract in a distinctive way.
|
Example provision: Franchisor (Franchise GİVİNG PARTY): ...........................Ticaret Ltd Şti (Tax Identification Number: ..................) Address:..................................................... Franchisee (Franchise taking party): ............................... (Tax Identification Number: ..................) Address:..................................................... |
2. SUBJECT OF THE CONTRACT
|
Example provision: This agreement regulates the procedures and principles of the franchisee's use of the.................brand belonging to the franchisor in return for the price and conditions determined in the agreement. Example clause: The subject matter of this agreement is the use by the franchisee of the franchisor's trademark, know-how and other intellectual property rights, the procurement and supply of products bearing the franchisor's trademark, the sale and marketing of these products in return for the "contract price", duration and conditions specified in the agreement. |
3. BRAND:
| Example provision: When the word "brand" is used in this agreement, the Franchisor's registered trademark '...............' should be understood. |
4. BEGINNING OF THE CONTRACT:
| Example provision: The commencement of the agreement shall be based on the date .................... on which the parties have signed this agreement by mutual agreement. |
5. CONTRACT DURATION:
| Example provision: The
validity period of this agreement between the parties is ..........
years from the date of commencement. Example provision: This contract has been concluded for an indefinite period of time and it is accepted and undertaken that it will not be terminated for the first 5 (five) years from the start date of the contract. |
6. FRANCHISING FEE:
The franchisee, which is financially no different from an independent business, initially pays a certain entrance fee to the franchisor and, in addition, undertakes to pay a certain percentage of its turnover annually. These payment obligations are called "franchise entry fee" and "franchise usage fee" and they are the main elements of the contract. Franchise usage fee is called "royalty". The royalty payments, which are made regularly every year, are paid as a percentage of the annual turnover and profit at a rate determined in the contract, and are similar to a kind of rent payment made in return for the use of intellectual property rights.
In this part of the agreement, the currency in which the franchise fee will be paid, when and in what amount must be clearly regulated.
|
Example provision: The franchisee shall pay...............TL/USD as franchise participation fee. The participation fee shall be paid within.................days from the beginning of the Agreement. Example provision: The franchisee agrees, declares and undertakes to pay...................% royalty on its daily gross sales or............. once a day. |
7. KNOW-HOW UTILIZATION
|
Example provision: The Franchisee has accepted and undertaken to apply the Know How of the Franchisor, which is detailed in the annex of this agreement, with care and diligence within the framework of the obligation to act as a prudent businessman arising from the Turkish Commercial Code. |
8. CONTRACT TERMS
The rights and obligations granted to the franchisor and the rights and obligations granted to the franchisee should be regulated in detail in the contract terms section. This part, where the mutual rights and obligations of the parties are regulated, is very important. We will be content with giving a few general examples regarding this section, which will vary depending on the sector, line of business and subject matter of the agreement. Because this part of the agreement should be regulated by taking into consideration the demands and expectations of the parties, the sector in which they operate, and the specific characteristics of the commercial system they are trying to establish. For example, a franchising agreement for a restaurant chain will be different from a franchising agreement for a hotel or school chain. It is necessary to regulate all kinds of details that fall within the subject matter of the business, such as the subjects in which the franchisor will support the franchisee, trainings, execution of advertising campaigns, use of the logo, work clothes, store designs, sales prices.
In practice, many disputes arise over the contractual obligations of the parties. Since the needs of each business subject are different, it is recommended to seek the assistance of a specialized legal expert on this part of the contract. Only a few articles are given below as an example, and these provisions need to be regulated in much more detail.
8.1. Obligations of the franchisor:
- To provide 2 months of training to all staff on application and service.
- Supporting the franchisee in product supply and product-based problems
- Providing catalogs and brochures with the brand logo printed on them
8.2. Rights granted to the Franchisor:
- The Franchisor has the right to inspect the operation of the established commercial system, service standards, cleanliness and hygiene status, prices, and to request reports and information at any time and in any manner.
- Franchisor may transfer or assign all or part of its rights and obligations arising from this agreement to third parties outside the agreement.
8.3. Franchisee's obligations;
- The franchisee is obliged to be personally present in the business and to manage and supervise the service continuously. The franchisor is right to assume that the franchisee is in charge of the business. Otherwise, the franchisor may request and sue for the sanctions stipulated in the contract.
- The franchisee is obliged to conduct business in accordance with the instructions and rules determined by the franchisor.
- The franchisee is obliged to periodically deliver the computer bulk sales reports to the franchisor's center written in this agreement on the last day of each month.
- The franchisee is obliged to take the necessary measures and maintain order for the protection of the reputation of the franchise system and the growth of its business.
8.4. Rights granted to the franchisee:
- Using the registered trademark and logo of the Franchisor in the store located at the address specified in the contract.
- Using banners, signboards and advertising tools related to the brand in the workplace.
- The franchisee may only use the franchise right in the facility written in the agreement.
9. TERMINATION OF CONTRACT
Franchising agreements may be limited to a certain period of time or indefinite time according to the need. If the agreement is made for a certain period of time, the agreement will expire on the expiration date of this period. However, if the parties actually continue to implement the contract even though the period has expired, then the contract becomes indefinite.
If there are justified reasons to terminate the agreement, both parties have the right and authority to terminate the agreement. In the franchising agreement, the justified reasons that will cause the termination of the agreement should be specified. Thus, both parties will have the right to unilaterally terminate the agreement without the acceptance and approval of the other party when one of these justified reasons occurs. Since this issue is important, it is important to clearly regulate in the text of the contract what are the justified reasons for termination, how to exercise the right of termination and the consequences of termination.
|
Example Provision: Franchisor has the right to terminate the agreement unilaterally if the franchisee does not act as a prudent and diligent businessman, if these behaviors damage the franchisor's business, commercial reputation, brand and customer relations and if he insists on this despite being warned in writing. In this case, the franchisee accepts, declares and undertakes to cover all material and moral damages suffered or likely to be suffered by the franchisor. |
10. CONFIDENTIALITY
|
Example Provision: The franchisee undertakes to ensure complete confidentiality in storing and transferring the system, program and similar special information and documents of the Franchisor to third parties. The franchisee cannot make third parties use all or part of the franchise right offered to its use without obtaining the written consent of the franchisor. In the event that it is determined that the franchisee has provided information and documents of this nature in violation of the rule described, the parties have agreed that the franchisor shall cover all damages arising therefrom. |
11. COMPETITION
The non-competition clause in franchising agreements should be regulated separately and carefully for both the franchisee and the franchisor. It is important that the subject and limits of the non-competition clause should be well drawn and limited to a period that does not contradict fundamental rights and freedoms. The example given below is very general and needs to be detailed and limited.
|
Example Provision: If this agreement is terminated or not renewed for any reason, ..........franchisee cannot manufacture, sell or have sold any product belonging to the franchisor for 2 years. In case of opposition to this provision, the franchisee accepts and undertakes to pay a compensation of...............USD. The franchisor is obliged not to grant franchises to anyone other than the franchisee in the same region as the franchisee (this geographical region should be defined). Violation of this obligation is a just cause of termination for the franchisee. |
12. AUTHORITY
According to the Code of Civil Procedure, merchants may conclude a jurisdiction agreement or add a jurisdiction clause to a contract. In the event that jurisdiction is regulated in a contract, the courts of the place specified in the jurisdiction clause become competent for the resolution of legal disputes arising from that contract between the parties.
|
Example Provision: Istanbul Anatolian Courts and enforcement offices are authorized in legal disputes arising from this agreement. |
Conclusion
Franchising agreements constitute one of the most preferred business models today. With this agreement, the franchisor transfers the brand, business name, logo and other intellectual property rights of its business to the franchisee and receives a fee in return.
The franchisee does his own business and the income belongs to him/her. The franchisor, on the other hand, provides him with the products and services necessary for his business, provides personnel training on the application, and carries out advertising activities. Franchising, which is a commercial system that has been tried and successful in many different sectors, is established and maintained with a framework franchising agreement and related side agreements. The successful establishment and continuation of this system, which is essentially a type of legal contract, depends on the success of the contracts as well as financial factors. Therefore, franchising agreements need to be detailed, comprehensive and party-specific.
You can contact our team for your legal questions and problems regarding franchising agreements.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.