The Franchise Network Keeps Growing, but the Contract Stays the Same
A coffee chain opens its sixth location under a franchise model, an international fashion brand looks for a local franchisee, and a digital services company wants to license its brand to independent operators across the country. In each of these scenarios, one document sits at the center: the franchise agreement. This is the contract that determines exactly what the franchisee receives, how much it pays, and what happens when the relationship ends.
Franchising continues to expand across Israel's food, retail, fitness, and services sectors, and technology companies increasingly adopt franchise-like models to distribute a product or platform through local partners. As the model spreads, so does the volume of disputes over contract termination, deviation from brand standards, and claims of reputational harm.
Unlike many other jurisdictions, Israel has no dedicated statute regulating franchising. In practical terms, this means that legal protection for both sides of the relationship — the franchisee and the franchisor — depends almost entirely on the quality of the drafting in the agreement itself.
There Is No Franchise Law in Israel, So What Governs the Relationship?
In the absence of dedicated legislation, franchise agreements in Israel are governed by general contract law: the Contracts Law (General Part), 5733-1973, and the Contracts Law (Remedies for Breach of Contract), 5731-1970. The duty of good faith set out in Section 12 of the Contracts Law also applies to the pre-signing negotiation stage, obligating the franchisor to disclose material information — for example, the real profitability data of existing branches, rather than inflated projections.
Additional bodies of law apply depending on the content of the agreement: the Consumer Protection Law, 5741-1981, may be relevant if the franchisee is deemed a "consumer" vis-à-vis a particular supplier within the system; the Trademarks Ordinance [New Version] governs the license to use the brand; and the Economic Competition Law, 5748-1988 (formerly the Restrictive Trade Practices Law), may apply to territorial restrictions and exclusive purchasing conditions.
The absence of a dedicated franchise statute means Israeli case law tends to rely on general principles of contractual fairness, bargaining-power balance, and good faith — particularly where there is a pronounced disparity in bargaining power between a large franchise network and an individual franchisee.
What a Properly Drafted Franchise Agreement Must Address
A balanced franchise agreement should clearly anchor several elements that recur in nearly every dispute that reaches the courts:
- Scope of the franchise and territory — whether regional exclusivity applies, and what happens if the franchisor opens a nearby branch itself or through another franchisee.
- Payments — initial franchise fees, ongoing royalties, and marketing contributions, with a precise definition of the calculation basis (revenue, gross profit, etc.).
- Operations manual and standards — the franchisee's obligation to follow a binding operations manual, and the franchisor's right to conduct audits and enforce changes.
- Training and support — concrete commitments from the franchisor, not merely general statements about "professional guidance."
- Procurement and suppliers — whether the franchisee must purchase from designated sources, and under what terms.
- Term and renewal — the duration of the agreement, automatic renewal conditions, and grounds for refusing renewal.
- Termination and non-compete — the termination process, its financial consequences, and post-termination obligations.
An agreement that leaves any of these provisions vague or missing creates fertile ground for dispute the moment the business relationship becomes strained.
Trademark Licensing Requires Genuine Quality Control
At the heart of every franchise agreement lies a license to use a trademark, trade name, and visual brand identity. That license must be clearly defined — what may be used, where, and under what graphic and quality specifications.
A risk franchisors often underestimate: a trademark license without an effective quality-control mechanism (naked licensing) can undermine the validity of the mark itself, because it strips away the connection between the mark and its source. The agreement should include not just a general statement about "maintaining standards," but a genuine audit and enforcement mechanism — spot inspections, periodic reports, and clear sanctions for non-compliance.
Beyond the trademark itself, ownership of improvements and content also needs to be addressed. If a franchisee develops a local adaptation of the product, menu, or workflow, the agreement should determine in advance who owns the intellectual property in that improvement — typically, the franchisor will require full ownership or a broad license to use it.
Exclusivity and Purchasing Terms Can Cross Into Restrictive Arrangement Territory
Many franchise agreements include territorial exclusivity clauses, mandatory purchasing from designated sources, and sometimes restrictions on the final retail price charged to customers. Such provisions can cross into the scope of the Economic Competition Law, 5748-1988.
Restricting the final sale price a franchisee may charge (vertical price fixing) is a particularly significant risk and may be deemed a prohibited restrictive arrangement under certain circumstances. An exclusive purchasing obligation from a single supplier may also be examined under reasonableness tests and its effect on competition in the relevant market, depending on the network's market share and the duration of the commitment.
Not every exclusivity clause is prohibited — on the contrary, a degree of control over supply and quality is legitimate and often necessary to preserve brand identity. Each such clause should, however, be reviewed in advance against the relevant competitive framework, rather than simply copying a foreign agreement template without adapting it to Israeli law.
What Happens the Day After the Franchise Relationship Ends
Most franchise disputes do not arise on signing day but on the day the relationship ends. A franchisee who has invested capital, time, and local goodwill sometimes faces an unexplained refusal to renew, or an immediate demand to vacate the premises and remove all use of the brand.
Israeli courts tend to examine the termination of a franchise agreement through the lens of the good-faith principle as well, particularly where there is a marked imbalance between the parties or where termination is abrupt and lacks reasonable notice. An agreement that fails to set out an orderly termination process in advance — a notice period, defined grounds for termination, and a mechanism for compensation or repurchase of inventory and equipment — significantly increases the risk of protracted litigation.
- A closed list of grounds for immediate termination (material breaches) should be defined in advance, distinct from ordinary termination at the end of the term.
- Clear "de-branding" obligations should be set — removal of signage, closure of brand-related social media channels, and return of training materials.
- A post-termination non-compete clause must be reasonable in its geographic and temporal scope, since courts examine such clauses with a level of scrutiny similar to that applied in employment law.
What to Check Before Signing a Franchise Agreement
Whether you are a network seeking franchisees or an entrepreneur considering joining an existing chain, it is worth conducting a systematic review before signing:
- Confirm that any financial figures presented (average profitability, revenue) are backed by documented sources, not only verbal representations.
- Verify that the territory and exclusivity definitions are precise and leave no room for interpretation.
- Review purchasing and supply clauses against antitrust law, particularly where an exclusive purchasing obligation exists.
- Confirm that a quality-control mechanism for the trademark exists and is clearly defined, for the benefit of both parties.
- Carefully read the termination and non-compete provisions, and assess whether their scope is reasonable and proportionate.
- Check whether the agreement is subject to foreign law and jurisdiction outside Israel, and what that means in practice.
A well-drafted franchise agreement is not merely a document that protects the franchisor. A balanced agreement that defines the rules of the game in advance for the entire lifecycle of the relationship — from signing to termination — significantly reduces the likelihood of costly litigation that harms both sides.
The information contained in this article is general in nature and does not constitute legal advice. For advice tailored to the specific circumstances of your company, we invite you to contact our firm.
