Sometimes you can enter into a contract that is titled a licence agreement but in fact turns out to be a franchise contract. Although there are similarities between the two, franchise agreements attract significant legal consequences, imposing rights and obligations upon both parties. So, if you are currently operating a business under a licence model – or considering entering into a licence agreement – you should consider whether your business is, in fact, a franchise disguised as a licence.
What is a Licence Agreement?
A licence agreement is a contract between an entity that owns a particular product or service (the licensor) and a third party (the 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 for which the licensee has this right, as well as the fees they have to pay in exchange for being able to exercise this right.
What is a Franchise Agreement?
A franchise is a type of business model where the owner of the business (the franchisor) grants rights to third parties (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 boils down to whether the following are present:
- a system or marketing plan that the franchisor has substantially suggested; and
- required use of a symbol (such as a trade mark) that the franchisor owns.
If the answer is yes, then you have entered into a franchise agreement.
Demonstrating the existence of a marketing plan or system that the franchisor has substantially suggested depends on the facts and circumstances surrounding each agreement. Some characteristics that the courts have previously found to be evidence that a franchise system exists include:
- franchisor has the right to audit your financial and business records;
- franchisor must pre-approve your advertising;
- franchisor conducts initial training which you must undergo; and
- franchisee can only sell the franchisor’s products or services.
Remember that each franchise or licence is different and that 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 can act towards each other.
There are specific rules around the information that a franchisor has to give the franchisee before entering into the agreement, as well as rules surrounding their ongoing obligations (particularly concerning financial disclosure, dispute resolution and termination of the agreement). The Franchising Code of Conduct (the Code) governs all franchise contracts and relationships. For example, if you have breached your licence agreement and clause 27 of the Code applies, you are entitled to a period in which you can try and remedy the violation before the franchisor is allowed to terminate the agreement.
The franchise contract also includes clear rules about how the parties can behave. For example, if a licence agreement is a franchise agreement, the contract cannot contain a clause forcing the licensee to pay the licensor’s costs of settling any disputes.
Even if the parties do not reflect these rights in the wording of the licence agreement, the Code will apply in the event of any inconsistency. 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.
If you are unsure whether your licensor is, in fact, a franchisor, you should speak with a franchise lawyer and determine whether they are complying with their obligations. Get in touch on 1300 544 755.