In a state where the economy is booming, Texas business litigation claims regarding franchise and franchisee contracts are also growing. From negligent misrepresentation to franchise disputes, more people are enlisting the help of a trusted Houston business attorney to help them successfully navigate the process. Before entering into franchise or franchisee contracts or if experiencing an issue with one of these contracts, consider trusting your case to legal counsel who knows how to mediate, negotiate, and represent you in a court of law should it be necessary.
The Purpose of Franchise and Franchisee Contracts
Franchise and franchisee contracts are legal documents that outline the terms of a business relationship between a franchisor and a franchisee. These contracts are specific in their terms in an effort for both parties to better understand expectations and responsibilities.
For the franchise or pre-established business, entering into this type of contract or agreement is a way to raise brand awareness and augment their bottom line without having to do all of the work themselves and in-person.
One of the main purposes of an individual entering into a franchise agreement is that they get to run their business largely on the coattails of an existing business plan. In other words, it can help prevent the need to build a brand-new client base and marketing strategy for success.
The three most common types of franchise agreements in Texas are:
- Single-unit franchises. In this type of situation, a franchisee is often the owner or operator and is generally in charge of just one store.
- Multi-unit franchises. This setup allows a franchisee to own more than one store. While they will still play an integral role in each store, it is typically to a lesser degree than in a single-unit franchise due to their expanded responsibilities.
- Area development franchises. In perhaps the largest undertaking of the three, a franchisee involved in this type of agreement can run multiple stores within the confines of a predetermined area.
What Is Typically Included in Franchise and Franchisee Contracts?
Since franchise and franchisee contracts deal with the sharing of an existing business’ practices with a new store, these legal documents are often quite detailed regarding factors such as:
- Grant of franchise. Essentially this section of a contract grants a franchisee limited and specific rights in regard to utilizing established logos, trademarks, operational models, etc.
- Term of franchise. A contract should stipulate specifically how long the agreement is valid for once it becomes official. This section may also provide guidance on terms of a potential renewal of the contract or the termination or expiration of the contract.
- Store opening. The terms of store openings usually address business elements such as start-up fees, the purchasing of items, and royalties. It is key to establish these provisions up front so that franchisees understand their role, as well as that of the franchisor.
- Ongoing support. Whether it is regarding advertising or additional store support, the contract should define specific obligations and requirements on the part of the franchisor and the franchisee to minimize confusion.
Other areas outlined in franchise and franchisee agreements that are frequently the source of potential legal disputes include:
- Confidentiality. While a contract does give temporary access to a franchise’s intellectual property and proprietary information, expect this section be detailed and specific about any limitations for using it.
- Non-competition clause. This is standard for most business contracts and is included to keep a franchisee from starting a new business that could potentially compete with the franchisor’s business, either while still working for the franchisor or after the agreement concludes.
- Indemnification clause. Another gold standard for business contracts, the presence of this clause typically indicates that the franchisee would be responsible for reimbursing the franchisor for losses tied to wrongdoing or negligence.
- Violations. These contracts may have a specific section regarding protocol in the case of a violation of the terms, or it may be woven into each individual provision. Either way, the document should clearly define what constitutes a violation of the agreement as well as potential consequences.
Why It’s Important To Work With An Attorney
While this type of contract can be beneficial for both a franchise and franchisee, there can be situations in which problems arise that require legal counsel.
For a franchisor, an example of a breach of the agreement could happen if a franchisee:
- Does not pay royalties
- Does not obtain necessary licensing
- Goes bankrupt
- Perpetrates a crime
For a franchisee, an example of a breach of agreement on the part of the franchisor may include:
- Committing misrepresentation or fraud
- Not providing store support as defined by the original contract
- Going bankrupt
The majority of franchise and franchisee disputes arise because a franchise and franchisee’s expectations are different and their interests are to an extent dependent on the other. However, by enlisting the assistance of a business attorney who intimately understands the components of franchise and franchisee contracts, businesses and store owners can better protect their rights in the reviewing of contract details and negotiating the terms of business.
Should a violation of the contract be committed, or one party believe there has been misrepresentation, an experienced attorney can assist and present the case in a court of law as needed.
If you have questions or concerns regarding a franchise or franchisee contract you have already entered into or about potentially signing a new contract, please contact our offices today.