Franchise Agreement
Matters that shall be included in a franchise agreement- The contents of an agreement are determined by and between the parties to the agreement. However, the 「Fair Transactions in Franchise Business Act」 prescribes matters that shall be included in a franchise agreement to protect prospective franchisees or franchisees.
- The following are 19 matters that shall be included in any franchise agreement (Article 11(2) of the 「Fair Transactions in Franchise Business Act」 and Article 12 of the 「Enforcement Decree of the Fair Transactions in Franchise Business Act」).
· Matters concerning the granting of a license for business marks
· Matters concerning the terms and conditions of business activities of the franchisee
· Matters concerning education, training, and business guidance for the franchisee
· Matters concerning the payment of franchise fees, etc.
· Matters concerning the demarcation of business territory
· Matters concerning the term of the agreement
· Matters concerning the transfer of business
· Matters concerning the grounds for termination of the agreement
· The fact that a franchise deposit shall be deposited in the depository by up to two months from the date the prospective franchisee or franchisee enters into the franchise agreement (or by the date of commencement of the franchise business, where the franchisee commences the franchise business before such two months ends)
√ However, if a franchiser enters into an indemnity insurance contract, etc., for its franchisees, matters concerning the insurance policy shall be included therein.
· Matters concerning the case the prospective franchisee has consulted an attorney or a franchise trader regarding the information disclosure statement
· Matters concerning the obligation to compensate franchisees for losses arising from an act committed by the franchiser or any executive officer of the franchiser that contravenes social norms, such as committing an illegal act or impairing the reputation or creditability of franchise business
· Other matters concerning the rights and obligations of parties to the franchise business
√ Matters concerning conditions governing the return of money, such as a franchise fee
√ Matters concerning the installation of equipment, fixtures, etc. for the business of a franchisee, and the maintenance and repair thereof and the bearing of the related expenses
√ Matters concerning measures to be taken in the event of the termination and cancellation of a franchise agreement
√ Matters concerning good cause by which a franchiser may refuse to renew a franchise agreement
√ Matters concerning trade secrets of a franchiser
√ Matters concerning compensation for loss due to violation of a franchise agreement
√ Matters concerning procedures for the resolution of disputes between a franchiser and a franchisee
√ Where a franchiser transfers a franchise to another franchisee, matters concerning a franchise agreement with the former franchisee
√ Matters concerning measures to be taken at the expiration of the period of validity of a franchiser's intellectual property rights
Contents of franchise agreement- A franchiser and a prospective franchisee that intend to enter into a franchise agreement may add clauses in the franchise agreement beyond those that are required to be included in the franchise agreement.
- A franchiser shall not include in a franchise agreement any of the following types of unfair provisions (Article 17 of the 「Act on the Regulation of Terms and Conditions). If a franchiser violates this requirement, the Fair Trade Commission may order the franchiser to publicly announce the fact that it has been ordered to delete, revise, or correct the relevant unfair terms and conditions, and take other measures necessary to correct the terms and conditions (Article 17-2 of the 「Act on the Regulation of Terms and Conditions」).
· Any clause in a franchise agreement that is unreasonably unfavorable to a franchisee and is contrary to the principle of trust and good faith (Article 6 of the 「Act on the Regulation of Terms and Conditions)
· Any clause which exempts a franchiser, its agents, or its employees from liability for intentional or gross negligence on the part of the franchiser, its agents, or its employees (Article 7 of the 「Act on the Regulation of Terms and Conditions」)
· Any clause which obligates a franchisee to pay unreasonably heavy loss, including but not limited to, excessive liquidated loss for delay (Article 8 of the 「Act on the Regulation of Terms and Conditions」)
· Any clause which prevents the franchisee from cancelling or terminating the contract under the law, or limits the exercise of such right (Article 9 of the「Act on the Regulation of Terms and Conditions」)
· Any clause which, without a substantial reason, gives a franchiser the power to unilaterally determine or change the details of performance (Article 10 of the 「Act on the Regulation of Terms and Conditions」)
· Any clause which, without a substantial reason, excludes or limits a franchisee's rights of defense, offset of damages, etc., provided for by laws (Article 11 of the 「Act on the Regulation of Terms and Conditions」)
· Any clause which imposes unreasonably strict restrictions on the requirements for or the manner in which a franchisee may express their intent (Article 12 of the 「Act on the Regulation of Terms and Conditions」)
· Where a franchise agreement is entered into by the agent of a franchisee and the franchisee fails to perform his/her obligations, any clause in the franchise agreement which imposes on the agent an obligation to carry out the franchisee's obligations, in whole or in part (Article 13 of the 「Act on the Regulation of Terms and Conditions」)
· Any clause which unduly prohibits a franchisee from filing a lawsuit (Article 14 of the Act on the Regulation of Terms and Conditions」)
※ If any of the clauses listed above is included in a franchise agreement and becomes null and void, the remaining portion of the franchise agreement shall remain effective. However, where it is impossible to achieve the objective of the franchise agreement with only the effective parts or if such effective parts are unreasonably unfavorable to the franchisee, the franchise agreement shall be null and void (Article 16 of the 「Act on the Regulation of Terms and Conditions」).
- Where a franchiser omits any matter that shall be included in a franchise agreement, it may be subject to corrective measures, penalty surcharges, etc. (Articles 33 through 35 of the 「Fair Transactions in Franchise Business Act」).
※ Where a franchiser omits from a franchise agreement content that is legally required to be included in a franchise agreement, the franchisee that intends to enter into the franchise agreement may report such fact to the Fair Trade Commission (Article 32-3(1) of the 「Fair Transactions in Franchise Business Act」).
Effect of franchise agreement- A franchise agreement is entered into by and between a franchiser which is one party thereto and a number of prospective franchisees who are the other parties thereto. Thus, almost all franchise agreements take the form of terms and conditions.
- A franchise agreement taking the form of terms and conditions shall be classified as a Terms and Conditions document as prescribed by the 「Act on the Regulation of Terms and Conditions」, and therefore becomes subject thereto.
- Where a separate agreement is entered into
· If a franchiser and a franchisee that intend to enter into a franchise agreement agree on a matter in a manner that is different from what is stipulated in the terms and conditions, the agreement shall prevail over the terms and conditions.
· Thus, the 「Act on the Regulation of Terms and Conditions」 shall not apply to a separate agreement that is different from the terms and conditions and is entered into by and between a franchiser and a franchisee that intends to enter into a franchise agreement. The separate agreement shall be subject to the 「Civil Act」 or the 「Commercial Act」, and rights and obligations will arise as prescribed therein.
Provision of franchise agreement- A franchiser shall provide its prospective franchisees with a franchise agreement in advance of the following to help the prospective franchisees understand the details of the franchise agreement before concluding it (Article 11(1) of the 「Fair Transactions in Franchise Business Act」).
· Receiving a franchise fee from a prospective franchisee (if a prospective franchisee has deposited his/her franchise deposit in the depository, it shall be deemed that the franchiser has received such franchise deposit on the date the first deposit is made or the date a prospective franchisee agrees with the franchiser to make the first deposit of a franchise fee if the agreement on such date exists)
· Entering into the franchise agreement with a prospective franchisee