Franchise agreement: 10 key points

Every year, franchising attracts hundreds of companies looking to exploit an already well-known brand, a successful concept and a proven distribution model. But behind this promise of advantages and benefits lies a contract full of clauses, conditions and obligations. Each party, franchisor and franchisee, must understand the legal framework, the financial terms and the legal provisions that seal the relationship. Duration, territorial exclusivity, royalties, supply, technical assistance: nothing is left to chance.

The French Commercial Code, the Doubin Act and the French Supreme Court impose strict rules, from the pre-contractual DIP to early termination. Before signing, you need to weigh up every contractual element, anticipate the risks of competition, check confidentiality and protect your goodwill. Understanding the definition of a franchise contract is much more than reading a legal document: it means grasping the conditions for operating a commercial activity within a structured network.

In the following article, Goldwin Avocats, experts in business law, provides detailed explanations to help you decipher these issues and secure your decisions before committing yourself.

Key points to remember

• Franchise agreements must be drawn up in accordance with the Civil Code, the Commercial Code and competition law, with a compulsory DIP.
• Non-competition, exclusivity and confidentiality clauses must be carefully monitored to avoid any imbalance.
• A poorly drafted contract may be annulled or result in judicial termination for unfair terms.
• Each stage of the contract (DIP, signature, performance, termination) imposes strict obligations on both parties.
• Disputes often arise as a result of contractual imbalance, which is why you need the support of a specialist lawyer.

1. What is a franchise contract?

A franchise contract is, by definition, an agreement between the franchisor and the franchisee that organises a long-term relationship based on the transmission of know-how, the use of the franchisor’s brand and the franchisee’s right touse a recognised brand name and commercial concept. Franchising is a specific contract because it combines a common identity, ongoing assistance and reciprocal contractual obligations.

Under French law, it is not a named contract, but it is governed by specific legal provisions and fundamental texts:

• the Doubin Law (1989), which requires full pre-contractual information,
• the Commercial Code (art. L330-3), which lays down the obligation to provide future franchisees with a pre-contractual information document (DIP),
• the Civil Code (art. 1102 et seq.), which sets out the freedom of contract and the limits that must not be exceeded.

These provisions ensure that the franchisee is given all the features of the contract before committing to it: financial conditions, confidentiality clauses, distribution rights and limits, termination procedures.

Worthnoting: the Court of Cassation (Com., 20 March 2019, no. 17-31.536) confirmed that the absence of a DIP could result in the nullity of the contract, underlining the weight of legal elements in the validity of the franchise agreement and the protection of the franchisee.

2. The pillars of franchising and the parties to the contract

A franchise is based on 3 essential pillars recognised at European level (European Code of Franchise Ethics):

• the transfer of secret and substantial know-how,
• the use of a brand name and a protected trademark,
• andongoing assistance provided by the franchisor.

These elements make the franchise contract unique: without them, it could be reclassified as a simple distribution contract.

This contract unites two parties who are legally independent but interdependent in their success:

• The franchisor : owner of the brand and know-how, he acts as the head of the network and must preserve the common image.
• The franchisee: an independent trader who benefits from the established model but assumes the financial and legal risks associated with running his business.

3. Classification of franchise types

In addition to the pillars, there are several types of franchises which determine the nature of the contract and its main clauses:

• Service franchising: the franchisee uses know-how to offer a service under the franchisor’s brand name (e.g. Midas – car maintenance and repair).
• Distribution franchising: the franchisee markets products supplied by the franchisor under a common identity (e.g. Sephora – perfumery and cosmetics, international franchise).
• Industrial (or production) franchising: the franchisee manufactures and sells products using the franchisor’s brand and industrial processes (e.g. Paul – chain of bakeries producing and selling its own products).
• Mixed or master franchise: a combination of the other forms, often with territorial exclusivity. The franchisee may be authorised to develop a sub-network or manage several points of sale (e.g. McDonald’s – some franchisees control a territory and open several restaurants).

This classification has a direct impact on contractual obligations, financial terms (royalties, fees, supplies) and the distribution of legal and commercial risks between franchisor and franchisee.

4. The duration of the contract and its legal nature

The duration of a franchise contract is a key issue: it determines the period during which the franchisee has the right to use the franchisor’s brand. In practice, the initial term generally varies from 3 to 10 years, which corresponds to the time needed to amortise investments and test the solidity of the relationship.

This choice largely depends on the business sector. In fast food or fashion, where trends change rapidly, contracts are often shorter to maintain flexibility. Conversely, in sectors requiring heavy investment, such as the automotive or hotel industries, agreements may be for 15 to 20 years to ensure a return on investment.

The parties can also provide for renewal options: a 7-year contract, for example, can be extended for a further 5 years. This flexibility enables the franchisee to capitalise on the customer base developed and the franchisor to maintain the consistency of the distribution network.

In legal terms, franchising is considered to be a framework contract: it lays down the general rules and includes application contracts (supply, brand licensing, territorial exclusivity). The French Civil Code (art. 1210) prohibits any perpetual term, requiring the terms of termination and renewal to be anticipated.

Finding the ideal term involves balancing stability and adaptability: too short a term undermines the franchisee’s profitability; too long a term makes the network more rigid. That’s why it’s so important to work with a lawyer who is an expert in franchise law, to draw up a contract that is tailored to the interests of both parties.

5. The franchisor’s obligations

The franchisor must create the conditions necessary for the success of the project. The franchisor’s commitments are governed by the clauses of the contract and relate to the proper performance of the contract:

• Clearly defining rights and obligations
• Passing on up-to-date, operationalknow-how
• Licensing the brand and distinctive signs
• Ensuring ongoing technical and commercial support
• Define the geographical area and comply with distribution law
• Guarantee the implementation of confidentiality measures
• Preserve the coherence and reputation of the network

6. The franchisee’s obligations

In return, the franchisee must apply the concept rigorously and comply with the rules of practice set out in the contract. His main commitments are :

• Respect the concept, the common identity and the assigned geographical area
• To pay the entry fee and the agreed royalties
• Maintain consistent quality in the goods and services supplied
• Comply with theobligation of confidentiality regarding the know-how received
• Comply with the clauses of the contract: supply, communication, exclusivity, etc.
• Actively participate in the development and consistency of the model

7. The advantages and disadvantages of franchising

For the franchisee :

For the franchisor :

8. Drafting and negotiating the contract

The franchise agreement is the central tool that sets the legal framework for the relationship between franchisor and franchisee. Although there is no standard contract, each agreement must be carefully drafted in order to protect the interests of both parties and ensure that the business is run properly.

Under French law, the drafting must comply with the legal provisions of the Civil Code, the Commercial Code and competition law. The pre-contractual information document (DIP) remains a mandatory prerequisite, failing which the contract will be null and void.

The essential elements of the contract

A well-drafted franchise contract generally includes

• Duration and renewal terms
• Financial terms (entry fee, royalties)
• Rules for terminating the contract
• Use of the franchisor’sbrand in the case of a licence agreement
• Description of the know-how transferred and assistance obligations

Sensitive clauses to watch out for

Certain clauses require increased vigilance:

• Nullity clauses: absence of a DIP or contractual imbalance
• Non-competition clause: prohibits the franchisee from operating a similar business during and sometimes after the end of the contract
• Territorial exclusivity: protects the franchisee against a competitor setting up in its area of business
• Exclusivesupply or compulsory useclauses for certain products and services
• Clauses relating to the confidentiality and communication of commercial data

The risks of a poorly drafted contract

An ill-balanced contract may be challenged under competition or contract law. Certain unfair clauses may be annulled, and the parties held liable. The case law of the Cour de Cassation (French Supreme Court) regularly points out that the franchisor must respect the contractual balance, failing which the contract may be terminated.

To draft or negotiate a franchise agreement in complete safety, call on Goldwin Avocats, a Paris-based law firm specialising in contract law and distribution networks.

9. Operation and practical steps

Steps on the franchisor’s side

The franchisor organises the contract and oversees the relationship with his distribution network partners.

• Pre-contractual : submission of the DIP (20 days before signing the contract, art. L.330-3 of the Commercial Code)
• Signature : fixing the duration of the contract, the conditions of use of the brand and the terms and conditions for making know-how available.
• Performance : quality control, ongoing assistance, network management
• End of contract: exit procedures (non-renewal, early termination, transfer)

Stages on the franchisee side

The franchisee follows a precise path to secure his project:

• Analysis of the DIP and consultation (lawyer, expert, chamber of commerce)
• Signing the contract : formal acceptance and obtaining the right to operate
• Operation : opening of the outlet, compliance with the standards set out in the agreement.
• End of contract: return of distinctive signs, compliance with any post-contractual prohibitions.

10. Franchising risks and disputes

Franchise disputes often involve a misunderstanding of how the contract is to be run, or an imbalance between rights and obligations. Several scenarios are regularly brought before the courts:

• Nullity of the contract: absence of a DIP or misleading financial forecasts. The judge may consider that the franchisee’s consent has been vitiated.
• Contested performance of the contract: lack of commercial and/or technical support, breach of geographical exclusivity, or unrealistic forecasts.
• Requalification : a contract that is too restrictive may be requalified as an employment or commercial agency contract.
• Termination of the contract : early termination for serious misconduct, or disputes relating to exit arrangements (transfer, right of pre-emption, post-contractual obligations).

Note: sensitive clauses:

• Non-competition clauses that are too restrictive, sometimes sanctioned under distribution law.
• Poorly drafted nullity clauses that can undermine the overall validity of the contract
• Linked contracts (lease + franchise) creating incompatibilities

To limit these risks, it is advisable to consult a lawyer specialising in commercial disputes. His role is to anticipate sensitive points, check the conformity of clauses and secure the performance of the contract in compliance with distribution law.

Conclusion

Understanding the definition of a franchise contract means identifying the pillars that structure it, the contract clauses to watch out for, the practical stages, and also the advantages and limits of such a partnership. This guide has shed light on the obligations of the parties, the duration of the contract, the operating procedures and the risks of disputes. However, every project is unique and requires an in-depth legal analysis. Before signing, take the time to consult a professional.

Goldwin Avocats can help you negotiate and secure your franchise agreements, so as to protect your interests and maximise your chances of success.

Frequently asked questions about franchise agreements

How much does a franchise contract cost?

The cost of a franchise contract is made up of several items. The entry fee, often between €5,000 and €50,000, finances access to the brand, the transmission of know-how and start-up assistance. Then there are the periodic fees, generally 2% to 10% of sales, which pay for support, ongoing training and network management. Some networks also apply an advertising fee (1 to 3%). Lastly, the franchisee must cover the costs of the premises, fittings, initial stock and local communications.

Who draws up a franchise contract?

In practice, the contract is drawn up by the franchisor, often with the help of specialist lawyers. The franchisee must be accompanied to avoid any imbalance in the terms and conditions of the agreement.

The role of a lawyer such as Goldwin Avocats is to analyse each clause, to secure the negotiation and to anticipate the legal risks.

What mistakes do first-time franchisees make?

Many sign without examining :

• Non-competition clauses.
• Territorial exclusivity (sometimes too limited).
• Termination terms and conditions.

Such negligence can lead to costly disputes.

What should you do if you have a dispute with your franchisor?

First, the franchisee can resort to mediation. Failing that, legal action may be taken before the commercial division of the court. Judges will examine the balance of the contract and compliance with essential obligations. Case law shows that the courts severely punish serious breaches by the franchisor.