Sometimes you can enter into a contract that is titled a licence agreement but is, in reality, a franchise agreement. Franchise agreements attract significant legal consequences and impose rights and obligations upon both parties. If you are currently operating or considering operating your business under a licence model, you should consider whether your agreement is a licence or franchise agreement.

What is a Licence Agreement?

A licence agreement is a contract between a licensor who owns a particular product or service and a licensee. By entering into the licence agreement, the licensee gains the right to use the particular product, service or intellectual property that the licensor owns. The contract will usually set out the period during which the licensee will have this right. It will also state the fees the licensee has to pay in exchange for the right.

What is a Franchise Agreement?

In a franchise, the business owner or franchisor grants rights to franchisees to provide services or products using the franchisor’s name and systems. The franchise agreement is the contract that the franchisor enters into with each franchisee. As the terms of each franchise relationship can vary, each franchise agreement is unique to that franchisee.

However, all franchise agreements will set out in substantial detail the system or marketing plan that the franchisee is to follow. This system or marketing plan is laid out by the franchisor and is a core part of what it means to be part of a franchise network. Moreover, in franchise businesses, franchisors specify the logo or symbols which their franchisees must use when operating their business.

How Do I Know If I Am Licensing or Franchising?

Often, the difference between a licence and a franchise comes down to whether:

  • a system or marketing plan is strongly suggested;
  • the use of a particular symbol is required (such as a trade mark).

If the answer is yes, then you have entered into a franchise agreement.

Whether a strongly suggested marketing plan or system exists depends on the facts and circumstances of each agreement. Some characteristics that the courts have previously found to be evidence that a franchise system exists include when:

  • the franchisor has the right to audit your financial and business records;
  • the franchisor must pre-approve your advertising;
  • you can only sell the franchisor’s products or services; and
  • the franchisor conducts initial training which you must undergo.

However, each franchise and licence is different and the existence of any (or all) of the above circumstances will not automatically mean that your licence agreement is a franchise agreement.

What Does This Mean?

If your licence agreement is, in fact, a franchise agreement, this has consequences for your contract. In particular, it can alter how you and the licensor (now franchisor) can act towards each other.

There are specific rules concerning the information your franchisor has to give you before you enter into the agreement. There are also rules surrounding their ongoing obligations. In particular, financial disclosure obligations, dispute resolution and agreement termination obligations. The Franchising Code of Conduct (the Code) governs all franchise contracts and relationships.

For example, if you have breached your agreement, you may be entitled under the Code to a period during which you can attempt to remedy the violation before the franchisor can terminate the agreement.

Franchise agreements also include clear rules about how the parties can behave.

For example, the contract cannot force you to pay the franchisor’s costs of settling any disputes.

Even if the “licence” (now franchise) agreement does not set out these rights and obligations, the Code will apply in any instance where the franchise agreement and the Code differs. As such, if your licence agreement turns out to be a franchise, you may have greater rights and protections than what is explicitly set out in the contract.

Key Takeaways

If you have entered into a licence agreement, you want to make sure it is not a franchise agreement and vice versa. This is important because a franchise and licence agreements impose different obligations and you have different rights under each. In addition, the Franchising Code of Conduct regulates all franchise agreements. If you have questions about your franchise or licence agreement, get in touch with LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page.

RSVP for our March 18 webinar: How to Franchise Your Business
If you own or operate a successful business and are looking for an avenue for rapid growth, franchising can be a great way to achieve that goal. LegalVision is hosting a free webinar to help business owners looking to expand into a franchise network. Register for free now.

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