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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
by Emily O’Connor
This table describes the content often found in a standard form of Master Franchise Agreement (MFA). Obviously, each Franchisor must tailor its MFA to its specific System and needs.
It is useful for the MFA to have a section defining key terms, either by use of a descriptive phrase or by cross-reference to a clause of the Agreement that contains a definition. It is often difficult to locate definitions in a document as complex as an MFA, and having a separate definitions section makes it easier to understand or find a particular definition.
The grant of rights given to the Master Franchisee should be spelled out, and often would include the right for the Master Franchisee to open its own Units and to sub-franchise to third parties. Define (1) the effective date, (2) the development term during which the Master Franchisee must open or sub-franchise a specified number of Units, and (3) the operating term during which the Master Franchisee can continue to operate its own Units and administer its sub-franchise System.
Also explain whether the Master Franchisee’s rights are non-exclusive or exclusive within a defined Territory, and list the rights that the Franchisor reserves for itself.
Describe the number of Units that the Master Franchisee and/or its Sub-Franchisees must open during the development term and then continue to operate or maintain during the operating term. Usually, there will be a development schedule attached as an exhibit. Some MFAs require or allow the Master Franchisee to open a pilot Unit to test the concept and/or to use as a training facility for Sub-Franchisees. Also define the consequences of the Master Franchisee’s failing to meet the development schedule and the Franchisor’s remedies and Master Franchisee’s cure rights.
[Page133:]Detail the Franchisor’s site selection criteria and site approval rights. Explain the manner in which the Master Franchisee’s own Units will be operated, either through a Unit addendum to the MFA but sometimes through a separate SFA for each location. Describe how the sub-franchised Units are to be operated pursuant to a separate SFA that the Master Franchisee will develop, either using its own form or the form mandated or suggested by the Franchisor, but always subject to approval by the Franchisor.
Also describe the conditions that must be satisfied before the Units can be opened, when the Units can be relocated with the Franchisor’s approval, and what happens if a Unit closes.
Explain the types of training to be provided by the Franchisor, where the training will be held, how many persons will be trained without charge, and the fees for training additional persons. Describe whether additional training courses will be required in the future, who must attend, and whether there will be any charge for such additional training. Typically the Master Franchisee and its owners, officers, directors and employees will be required to pay their own travel and accommodation expenses to attend training.
Specify the types of ongoing support the Franchisor will provide to the Master Franchisee during the term of the MFA. This may include, for example, the number of meetings that will be held each year, whether those meetings will be in person or by telephonic or video conference call, the persons who must attend those meetings and, for in-person meetings, the location of such meetings.
Also specify whether additional services will or can be provided by the Franchisor or by designated third parties, such as accounting services, software licenses, etc., and what the charges may be for such services.
Describe the Franchisor’s System specifications, standards, procedures and rules, and the fact that they may be detailed in an operations manual or other communications, and state the Master Franchisee’s obligation to comply with those items as they may be amended or revised from time to time. Explain that the Franchisor has the right to designate approved suppliers, provide various goods and services to the Master Franchisee and its Sub-Franchisees, and how the Master Franchisee can seek approval for the use of alternative suppliers.
Describe the Franchisor’s standard promotional and advertising program and the Master Franchisee’s obligation to set up a new Unit promotional program. Also describe how each Unit will be managed, the need for an approved manager, the training the manager will need, and how to replace a departing manager. The Master Franchisee should be expressly required to comply with all licensing and permitting requirements and to pay all required sales, use, VAT and similar taxes.
[Page134:]
Explain that all advertising using the Franchisor’s mark is subject to the prior written approval of the Franchisor. Describe any advertising or marketing fund to be maintained by the Franchisor and/or the Master Franchisee for the benefit of the Master Franchisee and/or Unit operators. Also describe how and whether the Master Franchisee and its Sub-Franchisees can use the Internet or social media to market the goods and services being sold. Within the European Union, however, Internet sales are so called “passive sales” and cannot be prohibited or limited by the Franchisor.
Describe the materials to be developed by the Master Franchisee, the Franchisor’s right to approve, amend or modify them, and which party owns any improvements to the System or developed materials. If the developed materials are to be translated into another language, also explain who bears the cost of translation and who owns the copyright in the translated material.
Describe the confidentiality obligations of the Master Franchisee, its owners, personnel and Sub-Franchisees, the in-term and post-term restrictive covenants, and the Master Franchisee’s obligation not to solicit employment of the Franchisor’s or other Franchisee’s employees for a period of time. Usually this provision will provide for injunctive relief, if available, or other remedies if the restrictive covenants are violated.
Describe the marks to be used by the Master Franchisee and its Sub- Franchisees, which party owns the marks, how the marks may be used, and that all goodwill arising from use of the marks inures to the benefit of the owner of the marks. If the Franchisor needs the Master Franchisee’s assistance to register the marks, describe the Master Franchisee’s required cooperation obligations. Also describe who has the responsibility to defend any claims of infringement, the Franchisor’s right to modify or discontinue use of a mark, and the Master Franchisee’s and its Sub-Franchisees’ obligation to replace an existing mark and to bear the cost for such replacement. Explain who has the right to use the marks in domain names and URLs.
[Page135:]
Detail the fees that the Master Franchisee must pay to the Franchisor, which could include an initial fee for the Master Franchise rights, any separate initial fee for each Unit opened by the Master Franchisee itself or by any Sub-Franchisee, and Franchise Fees to be paid on sales made by Master Franchisee- and/or Sub-Franchisee-owned Units. Specify when payments are to be made, what accompanying reports are required, the method of payment and the currency of payment. Describe any interest due on late payments and order in which the Franchisor will apply any payments made. Also describe the Master Franchisee’s obligation to pay any applicable withholding taxes, and whether there will be any gross-up of fee payments to offset the withholding taxes. If the target market has exchange controls, describe how the parties will deal with any controls that delay or impede timely payments.
Describe whether the Master Franchisee must use the Franchisor’s standard form of SFA with modifications subject to the Franchisor’s approval, or the Master Franchisee’s own form of SFA subject to the Franchisor’s approval. If the Master Franchisee can use its own form, detail the minimum standards that the SFA must meet. Also describe how the Sub-Franchisees are to be trained and by which party and what support the Master Franchisee must provide to them.
Describe the Franchisor’s right to transfer the MFA, and a prohibition on transfer of the MFA or assets of the Master Franchise company by the Master Franchisee or its owners without the Franchisor’s prior written consent. If transfer is to be permitted, detail the criteria the assignee must meet in order to be allowed assignment of the existing agreement or to enter into a new MFA. Also detail any transfer fees, transfers to and from and among owners, transfers to family members or heirs, and death or incapacity of key owners.
Describe the Franchisor’s right of first refusal to acquire ownership of the Master Franchisee company or its assets if a bona fide offer is made by a third party. Also describe any conditions on the initial capitalization and ownership structure.
Detail the monthly, quarterly and annual reports that the Master Franchisee must provide to the Franchisor, record-keeping requirements and the Franchisor’s audit rights. Also describe penalties to be imposed if an audit shows an underpayment of fees due.
Describe the Franchisor’s right to inspect the Units, to conduct sales surveys, audits and to otherwise monitor the activities of the Units.
[Page136:]
Describe whether the Master Franchisee has the right to renew the MFA or to acquire a successor development term to open and sub-franchise additional Units, or the right to acquire a successor operating term to operate Units. Also describe the criteria the Master Franchisee must meet in order to obtain renewal rights, the renewal fees to be paid, and the number of renewal terms.
Describe the grounds on which the Master Fanchisee can terminate the MFA and the Franchisor’s right to cure. Explain the Franchisor’s rights to terminate the MFA and state which grounds are curable and those which are not.
Also describe the Franchisor’s other remedies in the event of a breach, including the right to reduce the Territory or to make the agreement non-exclusive or to suspend the Franchisor’s performances under specified circumstances.
Describe the Master Franchisee’s obligations on expiration or termination, which could include (1) payment of amounts owed to the Franchisor, (2) ceasing use of the marks, (3) return of information, customer lists and developed materials to the Franchisor, (4) any continuing obligations, (5) whether the SFAs are to be terminated or assigned to the Franchisor or a designated third party, and (6) the Franchisor’s option to purchase the Master Franchisee’s Units or assets.
Explain the obligations of the owners of the Master Franchisee to provide a guaranty or other security for the Master Franchisee’s performance, such as by obtaining a standby letter of credit or providing a bank guaranty.
Describe the dispute resolution procedure to be followed, which could include (1) choice of venue, (2) use of mediation and/or (3) use of arbitration or litigation. If arbitration is selected, the provision should describe which arbitration rules will be used, the location of the arbitration, the number of arbitrators, the language of arbitration, the right to seek injunctive relief in a court, and who bears the costs of the arbitration. If litigation is selected, the provision should describe the forum and venue. Also describe whether the losing party must pay the winning party’s various costs and attorney’s fees, any liquidated damages obligations, and the absence of a right to set off or withhold monies due.
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Include provisions on (1) the Master Franchisee’s representations and warranties, (2) the Master Franchisee’s status as an independent contractor, (3) compliance with laws, including US export controls, Foreign Corrupt Practices Act and Anti-Terrorism laws, (4) indemnification obligations, (5) government approvals or filings, (6) visa assistance, (7) insurance obligations, (8) notices, (9) controlling language, (10) entire agreement and superseding of prior understandings, and (11) amendments.
In civil law jurisdictions the concept of representations and warranties does not have a legally binding meaning. If a fact is stated and is legally binding, it should be presented as a guaranty. The provisions regarding compliance with laws may be general in order not to exclude any laws. If these provisions are explicit, be certain to insert the phrase “including XX without excluding all relevant laws applicable”.
The exhibits to a MFA will often include (1) a list of the marks to be licensed, (2) a guaranty form, (3) a development schedule, (4) a list of owners and the ownership structure or ownership interests, (5) a noncompetition agreement, (6) a Unit addendum if the Master Franchisee will operate its own Units under the terms of the MFA, and (7) a form of SFA.