LEGAL VIEWPOINT: Franchise legal characteristics by Dr AbdelGadir Warsama Ghalib, Principal Legal Counsel, Bahrain

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Dr AbdelGadir Warsama Ghalib, Principal Legal Counsel, Bahrain

Trade activities are growing all over the globe, particularly in franchise activities. The trade agreements under the auspices of the world trade organization (WTO), the new-look style in products and services, the consumers interests, the evolution and spread of e-commerce, among other interests., have all led to great concern to open the borders for franchise trade. We see franchise contracts spreading, as we see in all corners, fast food outlets, soft drinks, brand clothes, electronics, accessories, brand models and many other products and diversified services.

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A fundamental element of a franchise relationship is that the franchisee possesses the right to offer, sell, or distribute the franchisor’s goods or services. This is the essence of a business relationship in which one party operates under the other party’s brand and image, using its goodwill and reputation to market goods and services. If a party to an agreement does not have the right to offer, sell, or distribute the others’ goods and services, then no franchise relationship exists.

Another common element of a franchise is the payment of a franchise fee, which generally is defined as a fee or charge that a franchisee must pay in exchange for the right to enter into a franchise agreement. The franchise fee generally takes the form of an upfront payment or ongoing royalty payments, but many other type of payments can qualify as franchise fee.

In addition to defining a franchise and the parties therein, there is the “disclosure requirements” in connection with a franchisor’s offering a franchise for sale. The required disclosure is known as a franchise disclosure document (FDD). The FDD, must contain certain specific items of information (normally to be mentioned in the law governing franchise) about the offered franchise and must be provided to any prospective franchisee. The type of info that must be addressed in the FDD shall include the basic info about the franchising company itself, litigation and bankruptcy history “if any”, initial fees for the franchise, other fees and payment required from the franchisee, any obligation of the franchisee to purchase goods, services or equipment from the franchisor, the obligations of the parties, and necessary info regarding the franchisor’s trademarks and intellectual property. The franchisor is under an obligation to provide the required FDD to any prospective franchisees before signing any agreement or any consideration whatsoever is paid.

The FDD Rule is purely a disclosure rule, it does not require prior approval before offering a franchise for sale nor to regulate the franchise relationship or assess the completeness or accuracy of disclosure documents. It is needed to guard against uninformed purchases of a franchise and is designed to create a minimum level of disclosure for all franchise offerings. Its main focus is on the disclosure of info that is deemed “material” to the offered sale, which is determined by whether “a reasonable prospective franchisee would consider the info as influencing the decision to purchase and conclude the deal.

The, disclosure requirement, constitutes a very important legal feature and important characteristic. We strongly advise all potential investors in our region, to be very careful in this respect otherwise, they may face uncountable unnecessary legal and logistical problems.

Franchise activities are welcomed and highly needed, however, the related contract needs to be carefully drafted to cater for the joint interests of the parties. To achieve this, we need to focus on the exact needs of the contracting parties and to keep away from cut and paste from other documents and contracts. A contract, specially tailored to fit the parties, will ultimately open the door for fruitful future relationship based on a win-win deal to all.