CHAPTER 18

OTHER GENERALLY USED CLAUSES

In addition to the clauses that relate specifically to the franchise, there are a number of other clauses that may be found in master franchise agreements and that might be of considerable importance. These include:

clauses relating to severability; entire agreement clauses; waivers; force majeure and hardship clauses; clauses relating to the nature of the agreement; cumulative rights clauses; notice provisions; and provisions relating to different types of damages.

A. CLAUSES RELATING TOSEVERABILITY

There are three possible approaches to invalid or illegal clauses in case of severability: the clause is considered as if it had never been stipulated, or the clause is replaced by another which is valid, legal and enforceable but achieves the objectives of the parties, or the clause is modified and interpreted in such a manner that its purpose may be achieved in all legality. As regards partially invalid clauses, the agreements may sometimes indicate that they should be considered to be enforceable to the extent that they are valid. There are agreements that give a certain discretion to the franchisor, in that they provide that the franchisor may terminate the agreement: if it considers that the exclusion of the particular provision concerned adversely affects its right to receive payment of fees or other remuneration;

B. ENTIRE AGREEMENT CLAUSES

So as to safeguard themselves against any surprising claims, franchisors will often include a clause which states that the agreement is the entire agreement between the parties and that it embodies all prior negotiations and/or all prior agreements reached. Other provisions may be linked to the entire agreement clause. Examples of such provisions include an acknowledgement by the sub-franchisor that it has not entered into the agreement as a result of any representations, warranties, inducements or promises and a requirement that if the subfranchisor thinks that any representations, warranties, inducements or promises have been made, and that they have been instrumental in making it take the decision to enter into the agreement, then it should submit a written statement to the franchisor to this effect, so as to permit the inclusion in the agreement of the contents of the written statement.

C. WAIVERS
Franchise agreements will often contain clauses waiving liability for the franchisor and/or disclaiming the waiving of any rights of the franchisor. Again, the amount of detail will vary depending on the origin of the contract, those from the common law countries entering into far greater detail. The waiver of liability will often be in the form of a recognition by the sub-franchisor that the success or otherwise of the business depends on its own efforts and that even if the franchisor and its staff have provided advice and assistance, operations manuals and training courses, the franchisor, its directors and employees will not be liable for any loss or damage suffered by the sub-franchisor.

D. FORCE MAJEURE AND HARDSHIP

Contracts will often contain clauses that provide either for the re-negotiation of the agreement in cases of changed circumstances (so-called hardship clauses) or for a suspension in performance in cases of force majeure. Hardship will often not make performance totally impossible, even if it becomes unduly onerous or difficult (for example an unexpected exorbitant increase in the cost of raw materials) and a re-negotiation of the agreement consequently becomes necessary if the relationship is to be maintained. Force majeure, on the other hand, is likely to result in an objective impossibility to perform, even if it is an impossibility that is limited in time (for example a declaration of war). of the development schedule.

H. DAMAGES

The types of damages that may be awarded vary from legal system to legal system. In some legal systems penalty clauses are not permitted (for example in the common law countries which instead admit what are known as liquidated damages), whereas in other countries they are, even if they may be subject to judicial control (this is the case, for example, in Germany). Often the amount of compensation will depend on the type of damages admitted. As the concepts vary from one country to another, master franchise agreements may choose to specify exactly for what harm compensation is recoverable (for example, only for the actual harm sustained).

CHAPTER 19 ANCILLARY DOCUMENTS

A. DOCUMENTING OTHER RELATIONSHIPS: A franchisor frequently has relationships with a sub-franchisor, or franchisee, which strictly speaking are not inherent in the franchise relationship itself. In addition to their relationship as franchisor and subfranchisor or franchisee, the parties may also be, for example:

seller and buyer; lender and borrower; landlord and tenant; or principal and agent.

B. DESCRIPTION OF ANCILLARY DOCUMENTS: The term ancillary documents refers to the preliminary agreements, side agreements and addenda that, in addition to the master franchise. C. THE PURPOSES OF ANCILLARY DOCUMENTS: Franchisors use ancillary documents for a variety of reasons. Firstly, by separating out into ancillary documents negotiated terms, one-time-only transactions, or issues not central to a master franchise arrangement, franchisors are able to maintain a basic uniform master franchise agreement that contains all the terms that are to remain consistent from one sub-franchisor to another. Secondly, ancillary documents are used to bind particular persons to promises to which they would not be bound by the master franchise agreement. Thirdly, franchisors use ancillary documents to make adjustments if the relationship changes after it is formed, for example if the sub-franchisor sells its business or brings in new investors. Changes of this nature will typically not require the execution of a new master franchise agreement, indeed, re-negotiating the agreement is often undesirable. Changes in the franchise relationship may therefore be documented by means of ancillary documents without disturbing the underlying obligations of the parties. Fourthly, franchisors use ancillary documents to comply with the laws of a particular jurisdiction. Some countries for example require the filing of a registered user agreement for trademark licenses, or a separate trademark licence agreement.

D. EXAMPLES OF ANCILLARY DOCUMENTS: The examples of ancillary documents given below are grouped asnfollows: the first group includes ancillary documents that often accompany master franchise agreements, the second group includes agreements the use of which depends on the nature of the franchised business the third group includes ancillary documents the use of which depends on the structure of the transaction the fourth group includes documents that may be required by local law.

I. ANCILLARY DOCUMENTS COMMONLY USED WITH MASTER FRANCHISE AGREEMENTS:

(a) Confidentiality Agreements (b) Non-Competition Agreements (c) Guarantee and Indemnity (d) Transfer Agreements (e) Termination Agreements (f) Release

II. ANCILLARY DOCUMENTS THAT MAY BE REQUIRED FOR THE FRANCHISED BUSINESS (a) Supply Agreements: When the purpose of the franchise is or includes the distribution or the use of products with or without a particular trademark the supply agreement may specify the terms on which the products are sold to the sub-franchisor by the franchisor. (b) Equipment Purchase or Lease Agreements: If the franchise requires specialised equipment the franchisor may recommend approved suppliers or give equipment specifications or may even itself sell or lease such equipment to the sub-franchisor. (c) Software Licence Agreements: Computer software is increasingly becoming a central element in franchise systems. Software licence agreements set out the terms under which the sub-franchisor may use and sub-licence software developed for the system.

III. ANCILLARY DOCUMENTS REQUIRED BY THE STRUCTURE OF CERTAIN TRANSACTIONS (a) Letters of Intent: In a letter of intent parties who are contemplating entering into a definitive agreement set out their agreement in principle on major issues. It is similar to a commitment agreement and may be used in the context of negotiations for master franchise or joint venture agreements. (b) Joint Venture Agreements: The contents of a joint venture agreement will vary considerably depending on the arrangements between the parties. Generally, however, the agreement will define: the joint venture's juridical form and authorised activities; the capital contributions and in-kind contributions to be provided by each party; the distribution of ownership interests and income between or among the parties; control and decision-making authority (for example the board of directors, or its equivalent, in the host country); (c) Agreements on Methods of Payment: A master franchise agreement will typically specify the method by which the sub-franchisor is to pay the continuing fees and other amounts owed to the franchisor, for example by wire transfer to a bank account in the franchisor's country. (d) Agreements Evidencing Financing Arrangements: Franchisors rarely lend money internationally to finance the initial investment or operation of a sub-franchisor. IV. ANCILLARY DOCUMENTS THAT MAY BE REQUIRED BY LOCAL LAW (a) Trademark Licence Agreement (b) Registered User Agreement

CHAPTER 20 REGULATORY REQUIREMENTS

Any entrepreneur engaged in a business that is international in character must therefore make sure that, in addition to all the requirements applicable to domestic businesses, also those applicable specifically to the international activity concerned have been met. A. EXAMPLES OF LICENCE AND PERMIT REQUIREMENTS I. PRIOR APPROVAL II. REGISTRATION IN THE APPROPRIATE REGISTERS III. PERMITS REQUIRED FOR THE FOREIGN ELEMENTS IV. FOREIGN EMPLOYEES OF THE FRANCHISOR V. AGENTS OF THE FRANCHISOR VI. IMPORT AND EXPORT LICENCES AND OTHER PERMITS REQUIRED AS A CONSEQUENCE OF IMPORT OR EXPORT RESTRICTIONS VII. EXPORT OF PROFITS AND CURRENCY RESTRICTIONS VIII. WITHHOLDING TAXES IX. TRADE-SPECIFIC REQUIREMENTS

B.BUSINESS FORMAT FRANCHISING

I. BASIC ELEMENTS
The basic elements of a business format franchise are that: an entrepreneur (the franchisor) has developed a system of doing business that works, and decides to grant another entrepreneur (the franchisee) the right to use this system; the two entrepreneurs are legally and financially independent enterprises: the franchisee invests its own money and takes the risk of losing the money it has invested if the enterprise does not succeed;

Some of these are potentially controversial and not all are present in all agreements at the same time. Which are present will be determined by the subject-matter of the agreement. Examples of such arrangements or undertakings are: an undertaking by the franchisor not to grant other franchises, or not itself to engage in the franchised business, within a certain specified area which the franchisee is granted the right to develop (territorial exclusivity); an obligation on the part of the franchisee to sell only the products of the franchisor (product exclusivity); an obligation on the part of the franchisee to buy the products it sells or uses in the franchise business only from the franchisor or from suppliers approved and/or recommended by the franchisor.

II. ADDITIONAL UNDERTAKINGS

C. ADVANTAGES AND DISADVANTAGES OF FRANCHISING FOR THE OPERATORS

I. ADVANTAGES FOR THE FRANCHISEE: One of the main advantages for the franchisee is

normally seen to be the fact that it enters into business carrying a well-known trademark or trade name. The franchisee, in other words, does not have to spend time, money and efforts trying to make itself known and appreciated in the market, it does not have to run the development risk in establishing the business as the franchisor has already run this risk. In effect, the franchisee already has a potential clientele.

II. DISADVANTAGES FOR THE FRANCHISEE: To be weighed against the advantages described above is the fact that the franchisee is not truly independent and is therefore not in a position always to decide the policy of its enterprise. Any major decisions will be taken either by the franchisor or by the franchisor in concert with the whole network of franchisees. The professional capability and seriousness of the franchisor is therefore crucial for the franchisee, as in many ways it is dependent upon the franchisor.