Franchise is a term, now incorporated into our vocabulary, to designate a new form of business based on the assignment of a foreign-business model, transferring rights from a franchisor to a franchisee to use the brand, distinctive signs, business model, industry secrets, and other elements that characterize the company. Therefore, because of these franchise contracts, distribution networks are implemented in which consumers identify the distributed or fabricated goods, or services that the franchisee provides as if a single company is involved. This situation is the result of company homogenization, even though each business owner is legally independent from each other and in respect to the franchisor.
Commercial activity under a franchise is defined in Article 62.1 of the RD 2485/1998 of 13 November of the Retail Trade Act as that which is carried out under an agreement or contract by a company, called the franchisor, who transfers to another, the franchisee, the right to operate under the franchisor’s business system for the commercialization of products or services.
The franchise sector in Spain represents a significant number of trade, justifying an important rise in efficient legal responses to the problems that may arise in this market. The 2011 data reflects the growth of this business formula up 6.5% compared to 2010. According to the Spanish Franchise Association, based on the data for the first quarter of 2012 on the presence of national brands in the world, there are currently 271 Spanish brands in over 118 markets, with a total of 17,081 operating establishments. Certain advantages have influenced this growth, such as the creation of an alternative to unemployment and the reduction of risk associated with a business in its infancy through an association with a trade name.
The regulation of the franchise agreement in Spain is not exhaustive, different issues that affect the agreement are regulated. First, regulations have legally recognised the figure of the franchisee and introduced protection for the franchisee, which is the weaker party in the franchise business. In this sense, regulations have established a series of pre-contractual duties that the franchisor must meet to protect the franchisee from possible abuse. With the same purpose of protecting the franchisee, Spain has created a Register of Franchisors, which includes useful information for the franchisee. Moreover, one must take into account both the Spanish and the European Union rules on competition.
These are the only limitations that one must take into account at the time of drafting a franchising contract. Other issues are subject to the principle of freedom of contract established in Article 1255 of the Spanish Civil Code, with only one general limitation, that the agreements do not infringe on any laws or moral or public orders. This implies that the franchising contract is an atypical contract since its content is not legally regulated.
As the contract is atypical in nature, its content is of great importance because the franchising contract is the basic and principle instrument to establish the rights and obligations of the franchisor and the franchisee as well as formally establish the content of the relationship in all respects. The contract should clearly contain the essential elements that every contract should have, as well as a detailed regulation of the basic content of this type of agreement.
The agreement constitutes a private document, signed by both parties, the franchisor and the franchisee. The essential content of the franchising contract is determined by three elements that characterize the franchise and serve to distinguish it from other similar institutions: the transfer of the property rights of the brand, the know-how (or the knowledge and practical processes verified by the franchisor as a result of its experience) and its continual support, and the commercial and technical support that the franchisor will provide during the contract period.
Moreover, we can highlight the following essential elements of a franchising contract:
- Remuneration to the franchisor: the parties usually agree on an initial fee and thereafter royalty payments (percentage of revenues or others) and/or fixed monthly amounts. It is also common to include a charge for the image so the franchisor invests in the advertising of the franchisee
- Exclusivity agreements in favour of the franchisee, which protects its exclusivity to operate in a geographic area
- Assumption of several obligations of the franchisee while the contract is in force: such as fulfilment of the business model, with objectives that the franchisor and franchisee should establish jointly, compliance with the fundamental aspects of the image, following the franchisor manual, and providing good customer service
- Duration: the parties usually agree on a minimum duration of five years so that the franchisee can protect its investment
- The franchisee has a post-contractual, non-compete obligation
- Specification of the courts with jurisdiction in the event of a conflict to avoid competition issues in case of hypothetical legal proceedings.
Considering the above, we recommend quality preparation and revision of the contract when starting a business as either a franchisee or franchisor. This is fundamental because it regulates the commercial relationship between both parties.
This article is not considered as legal advice