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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
by Emily O’Connor
The parties should be clearly identified. A short background or whereas-statements help to explain why the parties are entering into the agreement and provide background information.
By defining the phrases or terms frequently used in the agreement, these phrases or terms do not need to be explained every time they appear. By collecting all definitions in one section it will be easier to find the definition for these phrases and terms.
What are the grants given to the Developer? Are these rights exclusive or non-exclusive? Are the rights granted only for a certain Territory?
As this type of agreement will need a large investment, it tends to be a long-term agreement. Beware of local laws regarding term. It is common to have a fixed term with an option to renew rather than having an evergreen agreement. The option to renew may be combined with conditions. In common law jurisdictions, agreements without a stated term are unenforceable.
The Franchisor will be obligated to maintain and develop the System/ Concept, protect the Trademark, provide training, develop the System manual and perform quality assurance.
The Developer must establish and operate Units according to the Agreement and System standards, pay the fees and meet the Quality standards.
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Both parties will act in good faith, keep confidentiality and covenant not to compete. In common law jurisdictions, the parties rarely include a provision requiring them to act in good faith because doing so is not required, other than by a term in the Agreement requiring them to do so or a specific statutory provision.
Both parties agree that they are independent contractors and, therefore, are not entitled to represent the other party vis-Ã -vis third parties without an express right to do so or power of attorney. They agree to act to avoid misunderstanding in this matter.
The Franchisor is the owner of all Intellectual Property (Trademarks, Domain name, copyrights, etc.) and grants the Developer a license to these for the Term of the Agreement. For registration purposes and in case of infringement, the Developer must agree to assist the Franchisor, at the cost of the Franchisor.
The Franchisor will train the top management of the Developer so that the Developer can be the local trainer of its employees and staff. The Developer is obliged to participate in the other mandatory training programs prescribed by the Franchisor.
The Developer is responsible for the marketing within the Territory. A marketing plan must be produced on an annual basis by the Developer and submitted to the Franchisor for its approval. The Developer’s marketing must correspond with the marketing programs developed by the Franchisor.
The Developer will keep and maintain its financial accounting in accordance with generally accepted accounting principles and comply with the chart of accounts and other instructions issued by the Franchisor. The Developer must, upon demand by the Franchisor, provide to the Franchisor any materials which the Franchisor requests in order to carry out a review of the financial position of the business. The Developer must also allow the Franchisor to inspect and audit the Developer’s financial records and permit the Franchisor to inspect any Units operated by the Developer.
The Developer will usually pay an Initial Fee for the right to operate within the Territory. The Developer will also pay a Franchise Fee for the services that the Franchisor regularly provides to the Developer. The[Page140:]Developer may also pay a Unit Fee in connection with the opening of each Unit. To be able to provide adequate marketing services for all Units, the Developer will allocate part if its revenue for a monthly Marketing Fee, which will be added to a marketing fund. The Developer may also pay a Marketing Fee to the Franchisor that the Franchisor uses to develop marketing materials.
The Franchisor will be entitled to assign all of its rights pursuant to this agreement. The Developer will also be entitled to assign its rights pursuant to this agreement, but must obtain the prior written consent of the Franchisor.
The Agreement may be terminated in cases of material breach of contract, insolvency, vacancy in chief management positions etc. In some cases, the party that has breached the agreement will have a period of time stated in the agreement to cure the breach and retain its rights. In other situations the cause of the breach will permit termination with immediate effect.
In case of breach of contract, the affected party will be compensated for its damages. In some cases, the damage is hard or impossible to calculate. Because of this, liquidated damages may be agreed upon.
After the agreement is terminated or expires, a check list of what needs to be done by the parties is included in the agreement. This includes payment of amounts owed to the Franchisor, removal of trademarks, discontinuance of access to IT systems, and the Franchisor’s option to purchase the Developer’s Units or assets. The good faith covenant and confidentiality undertaking are not limited in time and the covenant not to compete will last for X months or years after the term.
If the Developer is a legal entity, it is common to obtain a guaranty of the (ultimate) owner, a natural person. If it is not considered reasonable in a jurisdiction to have a natural person give guaranties in a commercial agreement, the parties can agree to limit the guaranty to a reasonable amount or provide some other form of security, such as a letter of credit.
The parties will agree upon the procedures to be followed for dispute resolution, which could include (1) choice of venue, (2) use of mediation and (3) use of arbitration or litigation. If arbitration is selected, the parties will agree upon the arbitration organization (such as the International Chamber of Commerce) and rules to be used, the location of the arbitration, the number of arbitrators, the language of arbitration, the[Page141:]right to seek injunctive relief in a court, and who bears the costs of the arbitration. If litigation is selected, the parties will agree upon the forum and venue. This section also may describe whether the losing party must pay the winning party’s various costs and attorney’s fees, and the absence of a right to set off or withhold monies due.
Here are the so-called boiler plate clauses: changes and supplements, form of notice, interpretation of the Agreement and controlling language, Force Majeure, amendments, obligations to comply with laws (including export controls, anti-bribery and anti-terrorism laws, indemnification obligations, government approvals or filings, visas, and insurance obligations). In common law jurisdictions, the parties will include a provision stating that the agreement reflects their entire agreement and supersedes all prior understandings.
Check that the signing person has the authority to sign. Include a certificate of registration issued by the relevant authority (if possible).
The exhibits to an Area Development Agreement 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, and (6) a Unit Addendum to document the approval of and location of each Unit. In jurisdictions that require the filing of a Trademark License Agreement or a Registered User Agreement, the form for this agreement may also be attached.