LEGAL VIEWPOINT: Franchising and legal issues

By Dr AbdelGadir Warsama, Legal Counsel

Asia 728x90

Any business person, entrepreneur, SMEs or start-ups, who are interested in franchising business must give careful consideration to many sensitive issues, particularly legal issues. Herein, we draw the attention of potential franchisees to two legal points, the “Franchise Contract – FC” and the “Franchise Disclosure Agreement – FDA”. To begin with, it would be necessary to emphasis that, the mentioned two points are very essential and are of great effect in the future of the franchise activity.

The basic features of the relationship between the franchisor and the franchisee are to be exclusively embodied in the “Franchise Contract”. This contract, could be very complex document, due to its importance as the legal basis for the franchised business. Any franchisee, needs to be very careful before signing this contract, otherwise there is great legal risk.  In fact, reputable franchisors request their franchisees to obtain legal views before any start. But, not all lawyers or others are fully prepared and knowledgeable about such technical contracts. Also, for franchisees, to have comprehensive understanding, there is need to consult accountants, bankers, techs and others.

Legally, there are important provisions, in the franchise contract, to know, especially the terms covering the termination and the transfer of the franchise. In some cases, franchisors put provisions to give them the right of arbitrary cancellation of the franchise contract. Herein, there is a need for careful balance between the interests of both parties. The franchisee also needs to see clear provisions if he wants to sell and quit, or on the other hand, he wants to renew and extend the franchise tenure.

In many countries, there are certain laws to regulate franchising business. The focal point of such laws is around the “Franchise Disclosure Agreement – FDA”. Any franchisee needs to be aware of, the FDA, wherein the basic requirements explain that the franchisor must furnish potential franchisees with written disclosure providing all essential info about the franchisor, the franchised business and the franchise relationship. Franchisees must be given enough time to go through the disclosure and comprehend before signature.

The main idea behind, the FDA, is to protect potential franchisees and to give them the opportunity to assess the potential risks and benefits associated to the business. Generally, we advice franchisees, to ask for full disclosure for any point or issue they deem necessary.

Trust and honesty, play prominent role in promoting the relationship between the contracting parties. However, this should be coupled by clear legal documentation for mutual protection.