Incoterms_® and Commercial Contracts

The SFA is a UFA between the Master Franchise and a Sub-Franchisee. While the Master Franchisee may want simply to use the Franchisor’s or its own DFA as the SFA, the Master Franchisee needs to modify the DFA to add provisions that are needed to address specifically the nuances of the Sub-Franchise relationship. In 2012, the ICC adopted a Model International Franchising Contract to be used as a DFA⁵⁸. Annex 4 to this Report describes some of the additional content that often would need to be added or used to modify the ICC Model International Franchising Contract to make it suitable for use as an SFA.

There is an interesting difference of opinion among lawyers on which party should prepare the SFA. Many US lawyers for American Franchisors want the Master Franchisee to use the Franchisor’s form of SFA with minimal changes needed to reflect local law requirements, while many lawyers in other countries believe that the Master Franchisee should prepare the SFA using its own local form, subject to the approval of the Franchisor. While there is no right or wrong answer, and each situation may vary somewhat, perhaps the following discussion will help the reader decide which is the more prudent approach to take for its program.

9.1 LANGUAGE

As discussed in § 4.4.9 above, the SFA used by the Master Franchisee almost always should be in the local language. Regardless of whether the Master Franchisee uses the Franchisor’s form or its own form, the Franchisor undoubtedly will want a translation of the SFA (sometimes a certified copy), usually at the Master Franchisee’s cost.

9.2 PROTECTION OF FRANCHISOR KNOW-HOW/IP

The SFA, regardless of which party prepares the document, must expressly provide protection for the Franchisor’s Know-how or trade secrets. There should be an acknowledgment by the Sub-Franchisee that the Know-how or trade secrets are owned by the Franchisor, and the Sub-Franchisee and its employees and agents must agree to maintain the confidentiality of that information and not use it for any other purpose, either during or after the term. It may be necessary for all or certain of the Sub-Franchisee’s employees and agents to sign a separate confidentiality, non-disclosure and non-competition agreement.

In a similar fashion, the trademarks and the intellectual or industrial property (“IP”) used by the Sub-Franchisee will require an
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acknowledgment by the Sub-Franchisee that the Franchisor owns the IP, that all goodwill arising from use of the trademarks belongs to the Franchisor, and that the Sub-Franchisee will not use the IP for any purpose other than to perform under the SFA. The Sub-Franchisee may be required to provide notices at its place of business, and on its business cards and/or vehicles that it is independently owned and operated to minimize the risk that a third party may believe it is simply the alter ego of the Franchisor or Master Franchisee.

In addition, the SFA should address use by the Sub-Franchisee of domain names based on the Franchisor’s trademarks. (See § 4.3.2 above).

9.3 FRANCHISOR AS THIRD-PARTY BENEFICIARY

To the extent permitted by the local law of the Master Franchisee’s jurisdiction, the SFA may provide that the Franchisor is a third-party beneficiary of certain provisions of the SFA, such as the provisions dealing with the Franchisor’s Know-how, trade secrets, marks or other IP, with an independent right to enforce those provisions of the SFA.

9.4 CONTRIBUTION TO A FRANCHISOR ADVERTISING FUND

Many MFAs provide that the Master Franchisee and its Sub-Franchisees must contribute to any local advertising fund set up by the Master Franchisee, as well as a regional or global advertising fund administered by the Franchisor.

9.5 WHAT HAPPENS TO SUB-FRANCHISEES ONCE THE MFA IS TERMINATED?

There are a variety of approaches to be taken with respect to SFAs when the Franchisor terminates the MFA. Among them are:

• all of the SFAs automatically terminate;
• the Franchisor has the option for a limited period of time to have it or a nominee take an assignment of all or a selected number of those SFAs or they terminate;
• the Sub-Franchisee can continue to operate until its SFA terminates, with the SFA automatically being assigned to the Franchisor; or
• the Sub-Franchisee can continue to operate using the marks and/or the System until the SFA expires or is terminated (without being assigned to the Franchisor).

The risks with the last of the four alternatives discussed above is (1) who will be responsible for providing ongoing support to the Sub-Franchisee required by the SFA, and (2) if quality controls are not exerted over continued use of the mark, could that adversely affect the Franchisor’s trademark rights? One of the first three alternatives is a preferred option. Whichever of these three approaches is taken, both the MFA and SFAs need to clearly spell out the Franchisor’s rights and Master Franchisee’s obligations in such situations and the Master Franchisee and Sub- Franchisee each must acknowledge the Franchisor’s rights to take such action or to assume the SFA.

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9.6 COMPLIANCE WITH LAW

All SFAs should provide that the Sub-Franchisee must comply with applicable local law requirements. The Master Franchisee is in the best position to identify those laws and determine which local laws the Sub-Franchisee must comply with, but the Franchisor should verify this with its local counsel.

9.7 CHOICE OF LAW/DISPUTE RESOLUTION

Because the SFA is almost always a contract between two parties located in the same country, it makes the most sense to have the SFA governed by local law and with dispute resolution by arbitration or litigation in that jurisdiction. As a matter of fact, local law may not permit the law of another jurisdiction to govern that relationship. If the Franchisor has third-party beneficiary rights, it will have the ability to avail itself of these provisions.

9.8 FRANCHISOR APPROVAL OF FORM BEING USED

Unlike perhaps the MFA that can be governed by the Franchisor’s law and with dispute resolution in the Franchisor’s jurisdiction or a third country, as the foregoing discussion illustrates, the SFA must conform to local law requirements, be in the local language and provide for dispute resolution in that jurisdiction. Perhaps one approach that may give some comfort to both the Franchisor and Master Franchisee is to have a provision in the MFA that the Franchisor will provide a sample form of SFA containing the provisions that the Franchisor believes it needs to protect its Know-how, trade secrets, marks and other IP rights, but that the Master Franchisee is free to prepare its own form of SFA that will comply with local law but include the provisions the Franchisor believes are imperative, with the Master Franchisee’s version being subject to the approval of the Franchisor.

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