Franchising Agreements

Here’s an English translation of the provided text about franchising agreements:

Franchising agreements today create business relationships in many sectors such as food and beverage, education, oil, tourism, and logistics. Franchising agreements are framework agreements that may require multiple contracts between the franchisor and franchisee, creating mutual rights and obligations. In franchising agreements, the franchisor grants a type of commercial privilege to the franchisee for a fee. The content of this privilege includes using intellectual property rights such as trademarks, patents, licenses, and know-how that are part of the franchisor’s well-known business. The franchisor earns income as the franchisee pays for this privilege. The franchisee, instead of having to establish a completely new business, joins an “established system” so to speak, and enters commercial life with less risk thanks to the reputation and trust the franchisor has created in the sector.

In this article, we provided explanations on how franchising agreements, which are an important reality of commercial life, should be structured. We focused on what the franchisee and franchisor should pay attention to when preparing the contract, and at the end of our article, we included a sample franchising agreement. It should be noted that the sample contract is shared only to give an idea, and franchising agreements need to be arranged differently and specifically according to each sector and the parties to the contract.

Rights and Obligations of Parties in Franchising Agreements

In a franchise agreement, the franchisor is obligated to allow the franchisee to use the intellectual property rights of a business, known as intangible assets. Intellectual property rights refer to economically valuable elements such as trademarks, patents, business names, know-how, and business technical information. The franchisor transfers the right to use these elements, which have achieved certain recognition and success in the sector, to the franchisee in exchange for a certain franchise entry fee and periodically paid “royalties”. Additionally, the franchisor is obligated to support and protect the franchisee. Training the franchisee’s personnel, supervising personnel, determining work conditions, setting cleanliness and service rules, and determining sales prices are also among the rights and obligations of the franchisor. The franchisor is also obligated to supply the franchisee with necessary products and materials.

The franchisee is obligated to conduct business in accordance with the rules and instructions set by the franchisor. According to this agreement, the franchisee is required to pay a certain fee to the franchisor. This fee, called the franchise fee or royalty, is one of the essential elements of the agreement. Apart from this, the franchisee has the obligation to provide regular reports to the franchisor and to endure their inspections.

Reasons for Preferring the Franchising System

There are many commercial advantages for both parties in the franchising system. For the franchisor, the franchise system is a good method to increase the geographical and quantitative spread of their business, while for the franchisee, it is preferred because it minimizes risks and provides convenience. For an entrepreneur who wants to enter the business world or a merchant who wants to establish a new business, setting up a brand new business, establishing its order, gaining a certain reputation, and creating a customer base is a process that requires a lot of effort, work, and time. However, entering a commercial venture as a franchisee, using the name and facilities of an already recognized brand in the sector, promises successful results in a short time without having to endure such great troubles. Moreover, the franchisee can benefit from the franchisor’s professionalism in business life. Thus, they can access much more qualified services in legal and educational matters thanks to the franchisor.

Is it Necessary to Make a Franchising Agreement in Writing?

There is no requirement for franchising agreements to be made in any particular form to be valid. This is because franchising agreements are not regulated in any law in our legal system. Since there is no legal obligation, it is theoretically accepted that franchising agreements can be made even verbally between parties. However, in cases where it is claimed that the franchising agreement between the parties is fraudulent (deceptive) or that the agreement between them is not a franchising agreement but a distributorship agreement, or in cases where it is claimed that there is no agreement at all and there are allegations of trademark infringement, the existence of a written agreement becomes very important in terms of being able to prove the existence of the agreement. Although it is recommended that franchising agreements be made in writing as it is extremely useful for proof, franchising agreements that include trademark and patent licenses must be made in writing.

In practice, the lack of a written franchising agreement between the parties causes legal problems. One of the most common allegations is that the franchising agreement is collusive and its proof is an important issue. In the decisions of the Court of Cassation, the following determinations were made on how to prove the franchising agreement in the absence of a written agreement between the parties;

In the concrete dispute, the plaintiff creditor claimed that the Franchising Agreement allegedly concluded between the defendant third party and the defendant debtor was collusive and relied on commercial books and records and expert examination.

Pursuant to Article 31 of the CCP, these issues should be clarified, as it is understood that the debtor company has submitted the Franchising Agreement, bonds, receipts and invoices issued by the debtor company on behalf of the third party company. Obtaining a report from an expert (taking into consideration that the opening and closing certifications have been made) to determine whether the contract, invoices and records regarding the payment are available in the commercial books of the debtor company and the defendant third party, While the report to be obtained should be evaluated together with the other evidence available in the file and it should be determined whether the Franchising Agreement allegedly concluded between the third party and the debtor is collusive as claimed by the plaintiff creditor and a decision should be made about the claim of appropriation according to the result, it is not correct to decide to dismiss the lawsuit in writing as a result of incomplete examination and research (Court of Cassation 8th. Civil Chamber, 2018/15117 E., 2020/4343 K.)

As can be seen, a written agreement during the establishment of the franchise system provides great convenience in terms of proof and keeps the parties on a legally safe ground. Otherwise, it is extremely likely that disputes will arise in the future and the franchise system will be blocked. Below, we share an example of a franchising agreement to give an idea, although it has a simple form. We remind you that it is not suitable for use as a template, as its details and scope will vary according to each sector and contract parties.

SAMPLE FRANCHISING AGREEMENT
1. PARTIES

Franchising agreements have two parties. The first of these is called the franchisor and the other is called the franchisee. In this section, the title, tax identification numbers, addresses of the parties should be written in the contract in a distinctive way.

Sample provision: Franchisor (Franchisor): ………………………Ticaret Ltd Şti (Tax Identification Number: ………………) Address:…………………………………………….. Franchisee (Franchisee): …………………………. (Tax Identification Number:………………) Address:……………………………………………..

2. SUBJECT OF THE CONTRACT

Sample provision: This agreement regulates the procedures and principles of the franchisee’s use of the …………….. brand belonging to the franchisor in return for the price and conditions determined in the agreement. Sample provision: The subject matter of this agreement is the franchisee’s use of the franchisor’s trademark, know-how and other intellectual property rights, procurement and supply of products bearing the franchisor’s trademark, sales and marketing of these products in return for the “contract price”, duration and conditions specified in the contract.

3. BRAND:

Example provision: When the word “brand” is used in this agreement, the Franchisor’s registered trademark ‘……………’ should be understood.

4. BEGINNING OF THE CONTRACT:

Sample provision: The commencement of the agreement shall be based on the date ……………….. on which the parties have signed this agreement by mutual agreement.

5. CONTRACT DURATION:

Sample provision: The validity period of this agreement between the parties is ………. years from the date of commencement. Sample provision: This contract has been concluded for an indefinite period and it is accepted and undertaken that it will not be terminated for the first 5 (five) years from the start date of the contract.

6. FRANCHISING BEDELİ:

The franchisee, which is financially no different from an independent business, initially pays a certain entrance fee to the franchisor and, in addition, undertakes to pay a certain percentage of its turnover annually. These payment obligations are called “franchise entry fee” and “franchise usage fee” and they are the main elements of the contract. The franchise usage fee is called “royalty”. The royalty payments, which are made regularly every year, are paid as a percentage of the annual turnover and profit at a rate determined in the contract, and are similar to a kind of rent payment made in return for the use of intellectual property rights.

In this part of the agreement, the currency in which the franchise fee will be paid, when and in what amount should be clearly regulated.

 

Example provision: The franchisee shall pay ……………TL/USD as franchise participation fee. The participation fee shall be paid within ….. days from the beginning of the Agreement. Example provision: The franchisee accepts, declares and undertakes to pay ….% royalty on daily gross sales daily or …. every day .

7. KNOW-HOW UTILIZATION

Sample provision: The Franchisee has accepted and undertaken to apply the Know How of the Franchisor, which is detailed in the annex of this agreement, with care and diligence within the framework of the obligation to act as a prudent businessman arising from the Turkish Commercial Code.

8. CONTRACT TERMS

The rights and obligations granted to the franchisor and the rights and obligations granted to the franchisee should be regulated in detail in the contract terms section. This part, where the mutual rights and obligations of the parties are regulated, is very important. We will be content with giving a few general examples regarding this section, which will vary depending on the sector, line of business and subject matter of the agreement. Because this part of the agreement should be regulated by taking into consideration the demands and expectations of the parties, the sector in which they operate, and the specific characteristics of the commercial system they are trying to establish. For example, a franchising agreement for a restaurant chain will be different from a franchising agreement for a hotel or school chain. It is necessary to regulate all kinds of details that fall within the subject matter of the business, such as the subjects in which the franchisor will support the franchisee, trainings, execution of advertising campaigns, use of the logo, work clothes, store designs, sales prices.

In practice, many disputes arise over the contractual obligations of the parties. Since the needs of each business subject are different, it is recommended to seek the assistance of a specialized legal expert on this part of the contract. Only a few articles are given below as an example, and these provisions need to be regulated in much more detail.

8.1. Obligations of the franchisor: – Providing 2-month training to all employees on application and service. – To support the franchisee in product supply and product-based problems – Providing catalogs and brochures with the brand logo printed on them 8.2. Rights granted to the Franchisor: – Franchisor has the right to inspect the operation of the established commercial system, service standards, cleanliness and hygiene status, prices at any time and procedure, and to request reports and information. – The Franchisor may transfer or assign all or part of its rights and obligations arising from this contract to third parties outside the contract. 8.3. Franchisee’s obligations; – The franchisee is obliged to manage and supervise the service continuously by being personally present in the business. The franchisor is right to assume that the franchisee is in charge of the business. Otherwise, the franchisor may request and sue for the sanctions stipulated in the contract. – The franchisee is obliged to conduct business in accordance with the instructions and rules determined by the franchisor. – The franchisee is obliged to periodically deliver the computer bulk sales reports to the franchisor’s center written in this agreement on the last day of each month. – The franchisee is obliged to take the necessary measures and maintain order for the protection of the reputation of the franchise system and the growth of its business.

 

8.4. Rights granted to Franchisee: – Using the registered trademark and logo of the Franchisor in the store located at the address specified in the contract. – To use banners, signboards and advertising tools related to the brand in the workplace where it is located. – The franchisee can only use the franchise right in the facility written in the contract.

9. TERMINATION OF CONTRACT

Franchising agreements may be limited to a certain period of time or indefinite according to the need. If the agreement is made for a certain period of time, the agreement will expire on the expiration date of this period. However, if the parties actually continue to implement the contract even though the period has expired, then the contract becomes indefinite.

If there are justified reasons to terminate the contract, both parties have the right and authority to terminate the contract. In the franchising agreement, the justified reasons that will cause the termination of the agreement should be specified. Thus, both parties will have the right to unilaterally terminate the agreement without the acceptance and approval of the other party when one of these justified reasons occurs. Since this issue is important, it is important to clearly regulate in the text of the contract what are the justified reasons for termination, how to exercise the right of termination and the consequences of termination.

Example Provision: Franchisor has the right to terminate the agreement unilaterally if the franchisee does not act as a prudent and diligent businessman, if these behaviors damage the franchisor’s business, commercial reputation, brand and customer relations and if he insists on this despite being warned in writing. In this case, the franchisee accepts, declares and undertakes to cover all material and moral damages suffered or likely to be suffered by the franchisor.

10. PRIVACY

Sample Provision: The franchisee undertakes to ensure complete confidentiality in storing and transferring the system, program and similar special information and documents of the Franchisor to third parties. The franchisee cannot make third parties use all or part of the franchise right offered to its use without obtaining the written consent of the franchisor. In the event that it is determined that the franchisee has provided information and documents of this nature in violation of the rule described, the parties have agreed that the franchisor shall cover all damages arising therefrom.

11. COMPETITION

The non-competition clause in franchising agreements should be regulated separately and carefully for both the franchisee and the franchisor. It is important that the subject and limits of the non-competition clause should be well drawn and limited to a period that does not contradict fundamental rights and freedoms. The example given below is very general and needs to be detailed and limited.

Sample Provision: If this agreement is terminated or not renewed for any reason, ……….. cannot manufacture, sell or have sold any product belonging to the franchisor for 2 years. In case of opposition to this provision, the franchisee accepts and undertakes to pay compensation of …………… USD. The franchisor is obliged not to give franchises to anyone other than the franchisee in the same region as the franchisee (this geographical region should be defined). Violation of this obligation is a just cause of termination for the franchisee.

12. AUTHORITY

According to the Code of Civil Procedure, merchants may conclude a jurisdiction agreement or add a jurisdiction clause to a contract. In the event that jurisdiction is regulated in a contract, the courts of the place specified in the jurisdiction clause become competent for the resolution of legal disputes arising from that contract between the parties.

Sample Provision: Istanbul Anatolian Courts and enforcement offices are authorized in legal disputes arising from this agreement.

Franchising agreements constitute one of the most preferred business models today. With this contract, the franchisor transfers to the franchisee the brand, business name, logo and other intellectual property rights of the franchisee and receives a fee in return.

The franchisee does his own business and the income belongs to him. The franchisor, on the other hand, provides him with the products and services necessary for his business, trains personnel for implementation, and carries out advertising activities. Franchising, which is a commercial system that has been tried and successful in many different sectors, is established and maintained through a framework franchising agreement and related side agreements. The successful establishment and continuation of this system, which is essentially a kind of legal contract, depends on the success of the contracts as well as financial factors. For this reason, franchising agreements should be regulated in a detailed, comprehensive and party-specific manner.

You can contact our team for your legal questions and problems regarding franchising agreements.

Best regards.