The Concept of the Franchise Agreement
The franchise agreement is a long-term obligation relationship under which independent enterprises mutually undertake, as needed, by performing specific obligations to facilitate the production, sale and carrying out of services of goods. This definition matters for two reasons: first, the relationship is long-term, and its planning therefore takes place over a horizon of years; second, the parties remain independent enterprises — the franchisee does not become a branch or a subsidiary of the franchisor.
This natural reciprocity determines the whole chapter: the franchisor maintains and develops the system, while the franchisee pays remuneration and actively conducts the business. In Georgia this relationship is defined by a separate chapter of the Civil Code, and its norms create the minimal framework which the parties' agreement fills out in greater detail.
The Parties' Obligations
The franchisor is obliged to present to the franchisee, in the form used by it, the non-material property rights, trade marks and merchandise marks, models, packaging, the concept of the organization of production, purchase, sale and business of the goods, as well as other information necessary as an aid to sales. In practice this is the legal basis on which the franchisee receives the full package of the system — including the brand and the know-how.
The franchisor's second direction is the protection and development of the system: it is obliged to protect the unified system of action from the interference of third parties, to develop it uninterruptedly, and to support the franchisee by sharing business skills, supplying information and raising qualifications. These are not merely general words: the non-performance of the franchisor's obligations is directly linked to the possibility of reducing the remuneration.
The franchisee is obliged to pay remuneration whose amount is essentially calculated taking into account the contribution made to the implementation of the franchising system. Besides the remuneration, the franchisee is obliged, with the diligence of a fair entrepreneur, actively to conduct the business, to receive services and to purchase goods through the franchisor or persons designated by it, where this stands in direct connection with the purpose of the contract. The franchisee's activity and loyalty to the system are thus statutory requirements, not merely contractual courtesy.
The Form and Content of the Contract
The franchising contract requires written form for its validity. Besides the clear indication of the parties' mutual obligations, the duration of the contract, its termination or extension and other essential elements of the contract, the parties must include in the text of the contract a complete description of the franchising system. In practical terms this means that oral agreements and vague conditions are impermissible in a franchise relationship — the system must be fully described in the contract itself.
Loyal Competition After the End of the Contract
The peculiarity of a franchise is that the relationship continues after the expiry of the term — in the form of loyal competition. Even after the end of the contractual relationship the parties are obliged to grant each other loyal competition. Within this framework a prohibition of competition within a defined territory may be imposed on the franchisee, and it may not exceed one year.
Where the prohibition of competition may threaten the professional activity of the franchisee, the franchisee must be granted an appropriate financial compensation, irrespective of the expiry of the term of the contract. This rule protects the franchisee from the situation where the prohibition would in fact mean the loss of the profession: in exchange for the restriction, compensation must be paid.
The Franchisor's Liability
The franchisor is answerable for the rights and information contemplated by the franchise system. Where it culpably violates a contractual obligation, the franchisee is entitled to reduce the remuneration. The amount of the reduction must ultimately be determined by the conclusion of an independent expert, whose costs are borne by the parties. This mechanism gives the franchisee a concrete instrument: the injured party is not left merely with recording the loss but receives the right to reduce the remuneration, whose amount a neutral expert determines.
Frequently Asked Questions
Below are the most frequent questions about franchise agreements.
What form does the contract require?
Written, for validity; the text must reflect the parties' obligations, duration and a complete description of the franchising system.
How long may competition be banned?
Within a defined territory — no more than one year; where the ban threatens professional activity, the franchisee must receive financial compensation.
When may the fee be reduced?
Where the franchisor culpably breaches the contract; the amount is determined by an independent expert whose costs are borne by the parties.
Must the franchisee buy through the franchisor?
Yes, where this is directly connected with the purpose of the contract — services are received and goods purchased through the franchisor or persons designated by him.
How We Help on Legal.ge
In structuring a franchise agreement, the system is described first — which rights, marks, models and know-how are transferred to the franchisee; then the structure of the remuneration and its link to the contribution, the rules of procurement, the territory and the conditions of the competition prohibition are fixed — taking into account the one-year ceiling. At completion the rules of loyal competition and compensation are reflected, as well as the mechanism of reducing the remuneration in case of culpable breach. Each of these elements operates within the framework of civil legislation. The specialists of Legal.ge will assist you in preparing franchise agreements — from the side of both franchisor and franchisee.