Typical mistakes when concluding a franchise agreement
- Franchising or franchise, what comes to mind when we hear these words?
- Lack of understanding by the parties of the very essence of this type of contract
- Do not take into account the regional specifics of the regulation of this type of contracts
- Lack of registration of the agreement
- Do not check the status of the parties and the transferred intellectual property objects
- Do not contact lawyers for the service of preparing or proofreading and adjusting the draft contract
- Contact our legal team to learn more
Franchising or franchise, what comes to mind when we hear these words?
The thought immediately arises that we are talking about some kind of successful business model, about something expensive, perspective, fashionable. And in most cases, this is true. In general terms, franchising implies the right to work under the brand of another company, to use its business model and technologies, brand books and corporate style, rules of work and customer service, and sometimes material resources. And most often, such a business model is really successful, and the brand is well-known. But this is not necessary. There are thousands of franchises in the world that we, the average consumer, haven't even heard of, or at least didn't know they were franchises.
At the same time, despite all its attractiveness, a franchise is a complex contractual model that has a number of features both at the level of legal regulation and outside the legal field, and sometimes its own specifics in each individual jurisdiction. And often, the parties, turning to this business model, do not realize these difficulties and features, and sometimes make mistakes that can affect both the effective conduct of business and their relations in the future, and even, in some cases, entail liability, loss of trust, financial resources and reputation, and other adverse consequences.
We talked to REVERA's lawyers about the most common mistakes you can find when concluding a franchise agreement, what to look for when concluding this agreement.
Lack of understanding by the parties of the very essence of this type of contract
The most common mistake. A franchise agreement is often confused with other types of agreements, and first of all with a license agreement in relation to a trademark, and sometimes generally called any transfer of rights to an intellectual property object a franchise. Some people believe that a license agreement is a simplified version of a franchise agreement, but this is not entirely true.
Indeed, the full name of the franchise agreement under the Belarusian legislation is a complex entrepreneurial license (franchising) agreement (Chapter 53 of the Civil Code of the Republic of Belarus).
That is, it is actually a license, but more complex than just a trademark license.
Thus, according to Article 910 of the Civil Code of the Republic of Belarus, under a complex entrepreneurial license (franchising) agreement, one party (the rightholder) undertakes to provide the other party (the user) for a fee for a certain period of time or without specifying the term of the license complex, including the right to use the company name of the rightholder, other intellectual property objects provided for by the franchise agreement, as well as undisclosed information in the business activities of the user.
And according to Article 985. of the Civil Code of the Republic of Belarus, under a license agreement, the party that has the exclusive right to use an object of intellectual property (the licensor) grants the other party (the licensee) permission to use the corresponding object of intellectual property.
Thus, the difference between these agreements is that the license agreement is aimed at the use of only certain intellectual property objects (for example, it may include one or more trademarks), while the subject of the franchise agreement is a whole range of exclusive rights – to a trade name, trademark, patent, design, trade secret (know-how), may also include objects of copyright, computer programs, databases, etc.
Another important difference is the level of control on the part of the rightholder (franchisor). Within the framework of franchising, the rightholder has tighter control over the use of his brand, since all users (franchisees) operate within the framework of the general system. The rightholder provides the user with technical and commercial documentation, instructions and rules for the use of the brand, monitors compliance with all standards adopted by him, can control the location of the office and its design, advertising and promotion, as well as the functioning of the business as a whole. At the same time, the user is very limited in independence, since the main issues related to doing business are decided by the rightholder, or such issues must be agreed with him.
In addition, a franchise agreement differs in that it may provide for a number of restrictions on the user's rights, in particular, the rightholder may prohibit the implementation of activities competing with the rightholder and the sale of competitors' goods, set prices for goods, works and services sold by the user, and limit the territory of business. The establishment of such restrictions within the framework of other types of contracts may be a violation of antimonopoly legislation.
Another difference is that when concluding a franchise agreement, the rightholder bears additional (subsidiary) responsibility for the quality of goods and services offered by the user.
It is also important to note that the cost of a franchise is usually higher compared to a license, but in return you can actually get a ready-made business, and not just access to specific trademarks. At the same time, when choosing contractual relations, you should be guided by the goals and objectives of the business, and not by the difference in price.
Do not take into account the regional specifics of the regulation of this type of contracts
As already mentioned, a franchise agreement has a number of features, including in terms of the licensed complex, the right to use which is transferred.
According to the legislation of Belarus, the mandatory elements of the license complex transferred under the franchise agreement are the company name and undisclosed information. In most cases, a trademark is also included in the licensing complex, but is not its mandatory element, on a par with patents, designs, copyrights, etc.
Lack of registration of the agreement
The legislation of the Republic of Belarus (Article 910-1 of the Civil Code of the Republic of Belarus) establishes that a franchise agreement is concluded in writing and is subject to registration with the patent authority in the manner prescribed by law.
At the same time, the Regulation on the Registration of License Agreements, Agreements on the Assignment of Rights to Objects of Industrial Property Rights, Agreements on the Pledge of Property Rights Certified by a Certificate for a Trademark, Service Mark, and Agreements of a Comprehensive Entrepreneurial License (Franchising), approved by the Resolution of the Council of Ministers of the Republic of Belarus of March 21, 2009 No. 346, establishes that these agreements, in the absence of their registration with the patent authority (SI "National Center of Intellectual Property") are considered invalid and do not entail legal consequences.
IMPORTANT: according to the current legislation, not only the franchise agreement itself is subject to registration, but also the amendments and additions made to it, as well as its termination.
The legislation does not establish within what time frame after the conclusion and signing of the contract is subject to registration, however, in fact, registration must be carried out before the parties begin to fulfill their obligations under the contract (for example, the obligation to pay remuneration, etc.).
Unfortunately, quite often the parties limit themselves to simply signing a contract that may not meet the requirements of the law and, in fact, will be invalid.
A contract signed by the parties without its registration can even "work" for some time, and this situation is not uncommon. That is, as long as everyone is friends, there are no conflicts, the terms of the agreement are fulfilled, there are no complaints – there may be a feeling that everything is right and you can continue to work like this.
But as soon as conflicts arise, the terms of the contract cease to be fulfilled by the parties, mutual claims appear that can lead to a lawsuit, a situation arises with an invalid contract, which may result in the court's refusal to accept the claim, failure to comply with the requirements by the other party, termination of relations, penalties and other adverse consequences.
Thus, do not forget to check the requirements of the law and register the contract in a timely manner, if provided for by law.
Do not check the status of the parties and the transferred intellectual property objects
When choosing a franchise agreement for the form of consolidation of legal relations, you should first check the legal statuses of the parties, as well as the current status of the intellectual property objects transferred under the agreement. The absence of such verification may lead to negative consequences, including the refusal to register the contract and the impossibility of implementing the provisions and obligations of the parties laid down in it.
First of all, it should be borne in mind that only commercial organizations and individual entrepreneurs can be parties to a franchise agreement.
If under a franchise agreement, in addition to undisclosed information and a company name, other objects of industrial property rights are transferred, including those that have state registration (for example, trademarks, inventions, industrial designs, etc.), then the indication of these objects must be as clear and specific as possible (the text of the agreement or in the annexes to it must contain information from the relevant protective documents or registers, number of the registration certificate, other information allowing to identify the object).
It is also important to check the validity period of the documents of protection (it should not exceed the term of the agreement, unless there is a separate clause about it), the territory of their validity (for example, the trademark of the Russian Federation is not valid in the Republic of Belarus, and vice versa), whether the rightholder has real legal powers to grant the right to use such objects, the existence of previously concluded agreements in relation to the same objects in the same territory and verify them for contradictions with them.
Do not contact lawyers for the service of preparing or proofreading and adjusting the draft contract
A franchise agreement is one of the complex types of agreements, which contains a number of mandatory provisions, even if the parties to the agreement consider their inclusion unimportant and insignificant.
For example, the legislation clearly defines the subject of the contract, which is the provision of a license complex, which necessarily includes a company name and undisclosed information, in addition to other intellectual property objects.
Further, the contract must contain a description of the undisclosed information to be transferred. It is not necessary to disclose the essence of this information in detail, but it must be described in general terms and make sure that the transmitted undisclosed information is really such.
The agreement must also contain conditions on the territory of its validity and term, as well as provisions on the liability of the rightholder for the requirements imposed by the consumer on the franchise user.
In addition, the contract must contain the user's obligation to ensure that the quality of goods, works or services produced, performed or provided by the user corresponds to the quality of similar goods (works, services) produced (performed, rendered) by the rightholder.
The agreement must also contain provisions to prevent the consumer from being misled that he is using the license complex on the basis of a franchise agreement.
It is also important to check the agreement for contradictions with previously concluded agreements in relation to the same intellectual property in terms of the type of transfer of rights, the scope of the transferred rights, the term and territory of the agreement.
The presence of any of the above or other violations of the law and contradictions in the contract may serve as a basis for refusal to register it, which in turn will entail the loss of the official fee paid for the consideration and registration of the contract.
Of course, in practice, these common mistakes can occur both simultaneously and separately. It is important to remember that their consequences are the refusal to register or the impossibility of its execution by the parties, so attention to detail and trifles is especially important here.
Contact our legal team to learn more
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