Perfect understanding essential for franchise success

Khushbu Sundarji
Auckland, September 29, 2018
Before you sign a Franchise Agreement, you should review the terms carefully to ensure that you understand each clause.
The terms are the basis for the operation of the Franchise Agreement and your relationship with the Franchisor.
Key clauses to be aware of include the following:
Territory
Franchisees are usually given a specific territory which should include an area to conduct local marketing. You can only source clients from this area and some franchise agreements will provide that your restraint of trade includes the local marketing area.
Franchisor  obligations
The Franchisor  also has a range of obligations to the Franchisee under the franchise agreement. They must provide appropriate training and support to the Franchisee during the term of the franchise agreement. In the event you are having issues in running the business we always recommend that you speak with the franchisor  first. It is also common to have good faith obligations for both parties.
Franchisee obligations
Franchisees have a range of obligations under the franchise agreement. One of the main obligations is payment to the franchisor  of the royalty, marketing and other payments for the use of franchise system and the intellectual property associated with the system. Other obligations include operating the business in accordance with the operations manual, keeping all information given to you by the franchisor  in relation to the business confidential, and keeping and maintaining financial and employee records. Each of these obligations is mandatory and if you fail to comply this will be a breach of the franchise agreement.
Intellectual Property 
Under the franchise agreement, you are allowed to use the intellectual property of the franchisor  for the sole purpose of running the business. All trade marks, the operations manual and any other material associated with the system will be considered the intellectual property.
You cannot claim ownership of the intellectual property or use it for any other purpose apart from running the business and any attempt to do so will be a breach of your franchise agreement and a cause for immediate termination of your franchise agreement.


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Restraint of trade
When your franchise term ends, you will be restrained from being involved in a similar business for a period of time and within a specific area, unless the franchisor consents in writing. The courts in New Zealand acknowledge that although these on the face of it may be restrictive as it stops those restrained from earning money, commercially it is necessary to protect the Franchisor and its business. As long as the restraint is reasonable, the Courts will enforce the restraint, and recent court cases regarding Mike Pero are evidence of this.
Dispute Resolution
If there is a dispute between you and the Franchisor, until both parties have complied with the dispute resolution clause, neither party can commence court proceedings in relation to any dispute. The clause is comprehensive as to the timelines and the manner in which the parties must try resolve any issues. If the franchisor  belongs to the Franchise Association of New Zealand (FANZ) then under the Code of Practice it must have a dispute resolution clause in the agreement.
Termination
Generally, there are two classes of terminations.
There are events that are grounds for termination but you will still have an opportunity to remedy the breach. These grounds include not paying the royalty or any other payment due to the franchisor . The second class are events that will mean an immediate termination of your franchise agreement with no opportunities to remedy. These grounds include prejudicing the intellectual property of the franchisor , receiving two or more notices of breach within a certain time period, attempting to sell the business without the consent of the franchisor  and going into receivership or liquidation.
Conclusion
A Franchise Agreement is a legally binding contract and it is recommended that you obtain expert legal advice regarding the agreement. Issues usually arise when Franchisees have not clearly understood their obligations and then incur significant monetary consequences as a result of breaching their agreement.
Khushbu Sundarji is an Associate at the Stewart Germann Law Office based in Auckland.
Phone: (09) 3089925; khushbu@germann.co.nz; website www.germann.co.nz
Legal Disclaimer: The above article should be considered only a general guideline and not as specific advice. Indian Newslink and its Management, Stewart Germann Law Office and Khushbu Sundarji absolve themselves of all obligations in this connection. Please consult your lawyer and/or accountant before taking up any business mentioned in the above article.

 

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