Franchise agreement: key features and widespread mistakes

In our practice, we have repeatedly encountered misunderstanding by our clients of the peculiarities of the conclusion of a franchise agreement in Belarus and the resulting mistakes that have led to problems and the financial costs of correcting the situation.

Let us consider the most common mistakes that should be avoided when concluding a franchise agreement.

Mistake No. 1

Misunderstanding of the essence of the agreement, when the parties confuse the franchise agreement with other types of agreements.

It is not uncommon for parties to refer to another civil law agreement as franchising, which, in fact, has nothing to do with franchising or does not contain provisions that should be in such an agreement.

The most common case is the mixing of a franchise agreement and a licence agreement, for example, for a trademark.

According to Article 910 of the Civil Code, under a comprehensive entrepreneurial license (franchise) agreement, one party (the right holder) undertakes to provide the other party (the user) for a fee for a term or without a term specified in the franchise agreement with a licence complex that includes the right to use the right holder's trade name, other intellectual property objects (hereinafter - IPO) provided for in the franchise agreement, as well as undisclosed information in the user's business.

In other words, the firm name and undisclosed information are mandatory elements of the licence complex transferred under the franchise agreement. Other IPO, e.g. a trademark or a design, may be included therein, but are not obligatory under the Belarusian law.

This is the key difference between the franchise agreement under Belarusian law and, for example, under Russian law.

In the Russian Federation, a franchising agreement is called a commercial concession agreement under which one party (the right holder) undertakes to provide the other party (the user) with the right to use in the user's business for a fee for a term or without specifying a term the complex of exclusive rights owned by the right holder, including the right to a trademark, service mark, as well as rights to other IPO provided for in the agreement, in particular to a commercial designation, a production secret (know-how).

Thus, in the Russian Federation, it is the trademark which is the main element of the licence complex.

This difference in approach often leads to the fact that rights holders from the Russian Federation wishing to provide a licence complex to a user from Belarus for use in Belarus are guided by their law and understanding when concluding the agreement, which in turn results in the agreement not complying with the legal requirements of the territory for which it is concluded.

Mistake No. 2

Inclusion in the licence package of IPs that do not operate in the franchised territory

A fairly common mistake, especially when dealing with foreign counterparties. It is important that the IPO included in the licensing package should be valid and in effect (really existing).

Often the foreign right holder uses its model agreement or does not take into account the fact that, for example, the trademark of the Russian Federation is not valid in Belarus, which means that the rights to use it cannot be granted in Belarus. The same applies to patents, which also have territorial effect. Therefore, when transferring the rights to use any IPO, one must make sure that the subject matter is valid in the territory to which it is transferred (in relation to which the agreement is concluded), that its registration has not expired and that the rights to it really belong to the transferor and that he himself had the right to transfer them under the agreement.

The same applies to the person taking over the rights. He should make sure that he is buying a valid licence and that he is not paying for nothing.

Mistake No. 3

Failure to comply with contract registration requirements

This error is somewhat related to the previous ones.

According to the legislation of Belarus and many other countries, a franchise agreement is concluded in writing and must be registered with the patent authority. In the absence of registration, the franchise agreement is considered invalid.

The parties often neglect this requirement, believing that if an agreement is signed, it is possible to work under it and it has legal force, while registration is just a "convention", an unnecessary action.

Unfortunately, in practice there are many such cases, and many businesses in fact operate on the basis of invalid contracts. If a conflict arises between the parties, such as a breach of contract, payment disputes, etc., the parties will have great difficulty in defending their rights legally and judicially.

We have had such a case in our practice.

A Belarusian company worked for a long time, as it believed, under a franchising agreement concluded with a Russian rights holder.

In fact, the agreement signed by the parties had very little in common with a franchising agreement; rather, it was a licensing agreement to use a Russian trademark that was not in force in Belarus. 

The user was calm until one day he received a claim from another user, but under a valid franchise agreement concluded with the same Russian right holder, but duly registered in Belarus.

Having looked into the situation, we found out that the person who contacted us did indeed have a signed "franchising agreement" with the rights holder, but this agreement has no legal force, as it is not duly registered, it lacks some mandatory provisions, and it transferred the rights to use a Russian trademark in Belarus, which is not valid in Belarus. At the same time, the person who submitted the claim had a correct contract.

The Russian right holder did not want to interfere in the conflict actually created by his fault. As a result, the party who received the claim was forced to agree to the other party's terms.

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