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Franchise Agreements: Meaning, Format And Important Clauses

Published on 23 Mar 2019 by Shivi

Remember the McDonald’s India and Connaught Plaza Restaurants Pvt. Ltd fiasco in 2017 that led to temporary shutdown of the successful food chain in North and East India? The dispute between McDonald’s Indian unit and CPRL was over non-payment of royalties under the Franchise Agreement between the two.

The moment a business comes into existence, it becomes subject to various legal compliances and documentation requirements for its uninterrupted functioning. Once a business is established and plans to expand its operations by giving out its franchise, it requires to enter into an agreement with the individuals or businesses to whom the business is to be franchised. This document is known as a franchise agreement.

What Is A Franchise Agreement?

A Franchise Agreement is a legal document through which a business lends its franchise to another in the form of its activities and Intellectual Property and allows the latter to conduct its business in its name. The franchise agreement binds the franchisor i.e. the owner of the business and the franchisee i.e. the entity to whom the business is franchised.

A franchise agreement states the terms and conditions relating to the use of franchisor’s IPR, use of brand name, fees, penalties, royalty, standards of operation and the quality of product to be maintained. It also states the term for which the franchise is given, termination and dispute resolution.

Contents Of A Franchise Agreement

Every business comprises of distinct features and franchising it must be done through a legally binding agreement drafted by a good documentation lawyer. Legistify enables you to draft your Franchise Agreement online as per the requirements of your business and has laid down a short guide to the key contents of a franchise agreement in India.

  1. Details of the Franchisor and Franchisee: The franchise agreement must include the details of persons entering into the agreement i.e. the franchisor and franchisee.
  2. Fee of franchise and investment: A franchise agreement must mention the franchise fee that is paid to the franchisor. The agreement must also mention the approximate investment required to start its franchise business.
  3. Business Activities: The franchise agreement must contain the information regarding responsibilities of the franchisee and the franchise operation such as details of goods or services franchised, standards of operations, maintenance of accounts and other registers, inspection of the unit at regular intervals, etc.
  4. Payment of Royalty: The franchise agreement must state the royalty fees and the format in which it needs to be paid i.e. the payment mode, payment intervals- monthly, quarterly or annual payment, and bank account details.
  5. Training and operational support: The retail franchise agreement must also mention the training, technical and administrative support to be given by the franchisor to franchisee. This also includes support to market the franchisee and the amount needed to be paid by franchisee for such support.
  6. Intellectual Property Rights: The franchise agreement must include the way in which the franchisee can use the Trademark, Copyright and Trade Secrets of the franchisor. This clause lays down the Intellectual Property Rights that the franchisee gets to use, sell, distribute and manufacture the goods or services in the franchisor’s name and use the Copyrighted creation of the franchisor.
  7. Territory of franchisee’s operations: The Franchise agreement must state the location and territory within which the franchisee can conduct its business. This is important as the franchisor may franchise its business to different franchisee in different locations.
  8. Duration of the Franchise: The agreement must also state the duration for which the franchise is lent to the franchisee and the franchisee enjoys all the rights conferred to it by the business. The franchise is subject to renewal or termination post this period.
  9. Renewal or termination of agreement: It must be mention whether the franchisor wishes to renew the agreement post the duration of franchise or terminate it. This also lays down the terms and conditions for renewal and the grounds on which the franchise may be cancelled by the franchisor during the term of agreement.
  10. Resale of franchise: The franchise terms and conditions agreement must state whether there are any rights of reselling the franchise given to the franchisee.
  11. Applicable laws:  The agreement must describe laws applicable over the franchisor and franchisee and the legal action that can be taken by either of the parties in case of infringement.

A well-drafted franchise agreement is important to avoid any disputes that may arise of the relationship between the franchisor and franchisee regarding the use of franchisor’s business and IPR or any other terms of their agreement. Lack of a properly-drafted franchise agreement can leave the franchisor and franchisee exposed to legal disputes without proper redressal procedure. A balanced approach that takes into account, the rights of franchisor and franchisee must be implemented when drafting a brand franchise agreement.

Legistify’s impanelled documentation experts can help you with drafting franchise agreements in India as well as other business documents required for your business operations. For this, you can call us at 08468833013 or send us an email at [email protected].

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