Incoterms_® and Commercial Contracts

For information on Sub-Franchise Agreements, see the ICC Model International Franchising Contract¹⁵⁴.

This list sets out the additional content that often would be added to or used to modify a Direct Franchise Agreement to make it suitable for use as a SFA. Obviously, each Master Franchisee must tailor its SFA to its specific System and needs, generally with the approval of the Franchisor.

1 LANGUAGE

The SFA should be in the local language.

2 PROTECTION OF FRANCHISOR IP RIGHTS AND KNOW-HOW

Include an acknowledgment by the Sub-Franchisee that the IP Rights and Know-how are owned by the Franchisor, and that 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. Require all or certain of the Sub- Franchisee’s employees and agents to sign a separate confidentiality, non-disclosure and non-competition agreement.

Include an acknowledgment by the Sub-Franchisee that the Franchisor owns the IP Rights and Know-how, that all good will arising from use of the trademarks belongs to the Franchisor, and that the Sub-Franchisee will not use the IP Rights and Know-how for any other purpose other than to perform under the SFA. Any improvements to the IP Rights or Know-how suggested by the Sub-Franchisee will be owned by the Franchisor. The Sub-Franchisee should 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 the simply alter ego of the Franchisor or Master Franchisee.

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3 FRANCHISOR AS THIRD PARTY-BENEFICIARY

If permitted by the local law of the Sub-Franchisee’s jurisdiction, provide that the Franchisor is a third-party beneficiary of certain provisions of the SFA, such as the provisions dealing with the Franchisor’s IP Rights and Know-how, with an independent right to enforce those provisions of the SFA.

4 CONTRIBUTION TO A FRANCHISOR ADVERTISING FUND

Provide that the Sub-Franchisee must contribute to any local advertising fund set up by the Master Franchisee, as well as any regional or global advertising fund administered by the Franchisor for the benefit of the franchise System.

5 WHAT HAPPENS TO THE SUB-FRANCHISEE ONCE THE MFA IS TERMINATED?

Provide what happens to the Sub-Franchisee and SFA when the Franchisor terminates the MFA. Some alternatives include: (1) the SFA automatically terminates; (2) the Franchisor has the option for a limited period of time to have it or a designated person take an assignment of the SFA or to terminate it; (3) the Sub-Franchisee can continue to operate until its SFA terminates, with the SFA automatically being assigned to the Franchisor; or (4) the Sub-Franchisee can continue to operate using the mark until its SFA terminates.

The Franchisor’s rights in such situations should be clearly explained and the Master Franchisee and Sub-Franchisee must acknowledge the Franchisor’s rights to take such action or to assume the SFA.

6 COMPLIANCE WITH LAW

All SFAs should provide that the Sub-Franchisee must comply with applicable local law requirements.

7 CHOICE OF LAW/DISPUTE RESOLUTION

Because the SFA is almost always a contract between two parties located in the same country, the SFA should be governed by local law and with dispute resolution by arbitration or litigation in that jurisdiction. If the Franchisor has third party beneficiary rights, it will have the ability to avail itself of these provisions.

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