Drafting a franchise agreement

One way to spread your brand is through franchising. This option can also be beneficial for the franchise purchaser, who receives a ready-made work algorithm. These processes require legal registration in the form of a commercial concession or franchise agreement. To do this, you must first select the form of the contract, then agree on the essential conditions and, in certain cases, register the contract. You can read about how to conclude a franchise agreement in this article.

Contents: 

• Selecting Contract Form: commercial concession and alternatives
  • Advantages and disadvantages of a commercial concession agreement
  • General aspects of franchise contract drafting, regardless of the form 
• Steps in concluding a commercial concession agreement

Selecting Contract Form: commercial concession and alternatives      

Before concluding a franchise agreement, you need to pay attention to the regulation and understand what kind of agreement the parties are entering into. The legislation provides for a commercial concession agreement (Chapter 54 of the Civil Code of the Russian Federation). The qualifying feature of this agreement is the provision of a set of exclusive rights, including the right to a trademark or service mark (Article 1027 of the Civil Code of the Russian Federation). If the franchisor does not transfer the trademark, then the contract should be qualified as mixed, i.e., it contains elements of various agreements.

In practice, the use of alternative forms is widespread: a license agreement, an agreement for the provision of services for a fee, an agency agreement, the opening of branches. However, this carries certain risks. For example, a commercial organization has entered into a license agreement with an individual. The court found that the relationship between the parties is in fact concessional. A commercial concession agreement can only be concluded between commercial organizations or individual entrepreneurs. The court declared the agreement null and void, arguing that the parties tried to circumvent the rules on the subjects of the concession agreement (33-32410 / 2019). Thus, if you choose a different agreement, it is necessary to determine the likelihood of its re-qualification into a commercial concession agreement, and also to check the agreement for violation of the rules on commercial concession.

Advantages and disadvantages of a commercial concession agreement

The peculiarities of concluding a commercial concession agreement in comparison with a mixed one can be both advantages and disadvantages. This is primarily related to registration:

• Rospatent reviews the contract within 45 days, in case of errors, provides 3 months for correction, and then re-considers up to 45 days;
• You need to pay the registration fee;

At the same time, registration provides guarantees to the franchisee and the franchisor. In the absence of registration, the granting of rights is considered invalid. In practice, in each case, the court pays attention to factual circumstances. If the franchisee actually used the trademark, the lack of registration will actually have no effect. If the franchisee did not use and the registration did not take place, then the remuneration will have to be returned as unjust enrichment. Registration in Rospatent simplifies the process of proof for the parties.

General aspects when drawing up a franchise agreement, regardless of the form 

The most important condition of the contract, which is mandatory and without which the contract will be recognized as non-concluded, is the subject. The subject of a commercial concession agreement is to provide a set of exclusive rights, one of which is necessarily the right to a trademark. If under the agreement know-how is transferred without a trademark, then the court does not qualify this agreement as a commercial concession, and Rospatent will refuse registration. The transfer of a trademark implies that the franchisor owns the exclusive rights to registered trademarks. If the counterparty has not yet registered, this can be specified in the contract as one of the obligations. However, it is worth remembering that these are additional risks for you and can lead to litigation if the franchisor behaves in bad faith (А51-11422 / 2016). To identify the results of intellectual activity, it is worth indicating in the contract the numbers of documents certifying the rights of the franchisor.

A written form is required for a commercial concession agreement. In addition, it is subject to state registration with Rospatent. You can read more about registration in our article "How to register a commercial concession agreement with Rospatent". What happens if the parties do not meet these conditions:

• If the parties have not agreed writing form, the commercial concession agreement is deemed null and void.
• If the rightholder has not registered the commercial concession agreement, then the law indicates the following consequence: the granting of the right to use is considered invalid. Very often users (franchisees) refer to this provision and ask for a refund, although they actually used exclusive rights to the results of intellectual activity. The courts see this as an abuse of right and refuse, therefore registration does not cancel your agreement (А76-29378 / 2019).  

Also, in the commercial concession agreement, it is necessary to provide for the method of remuneration of the copyright holder. In general, a lump-sum fee (one-time payment) and royalties (periodic payments: fixed or variable) can be distinguished. You can read more about the methods of remuneration in our article "Royalties, flat fee and taxation under a franchise agreement."

Steps in concluding a commercial concession agreement

If you enter into a commercial concession agreement, you can follow these instructions.

Step 1. It is necessary to determine what exclusive rights will be transferred to the franchisee. Among them must necessarily be the right to a trademark.

Step 2. Then it is worth determining what services the franchisor will provide (consulting, supply of goods / materials, etc.).

Step 3. Determine who is responsible for registration. As a general rule, on the copyright holder. Prescribe in the contract what method of remuneration.

Step 4. Record the moment of execution of the contract, in particular, draw up an act of acceptance and transfer, which will help you prove the fact of execution of the contract.  

Thus, the conclusion of a commercial concession agreement is a process that begins with the decompilation of your business into parts, including the results of intellectual activity, and ends with registration with Rospatent. Ignoring any of the conditions in the agreement may lead to refusal of registration, therefore, the drafting of the agreement must be carried out in accordance with clear instructions. However, the franchisor must decide whether the commercial concession agreement is optimal for him or a mixed one is better. If you have any questions or need help drafting a franchise agreement, please contact A4 Law Firm lawyers.