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The article provides an overview of the pilotage contract, an atypical contract used in franchising to experiment with the business format.
The pilotage contract is an atypical contract, used in the franchising industry, that governs the relationship between an aspiring franchisor and a third party (the “pilot”) who is granted the right to experiment with the franchisor’s business formula, using its distinctive signs within a given location for a period of time generally of one year.
The franchisor is obligated to train the pilot, providing it with the necessary know-how and assistance, while the pilot must follow the franchisor’s directions and comply with quality standards. The piloting contract must regulate the mutual obligations of the parties, including the confidentiality of the contents of the know-how acquired during the piloting.
Upon the expiration of the pilotage contract, the signing of the franchise agreement may follow if the trial is deemed valid and effective.
Failure to test prior to the launch of a franchise network can result in significant legal and financial consequences for the franchisor.
Doctrine holds that a franchisee could even invoke the nullity of the franchise agreement due to franchisor liability. In addition, the franchisee could claim substantial compensation for damages incurred.
Let’s be clear, the Franchise Act does not explicitly provide for penalties for failure to test, but its importance is crucial in ensuring the validity and effectiveness of the business format and, therefore, of the contract itself.
To carry out the experimentation, the would-be franchisor can open one or more pilot units, operated directly, or use a third party through a pilotage contract.
The pilotage contract has some specificities compared to the franchise contract, including the lack of prior testing of the business format (which is an inescapable prerequisite of the franchise contract).
The natural outcome of the pilotage contract is the signing of a franchise contract between the same parties, but it may happen that the experimentation is not successful and the parties decide not to continue the contractual relationship.
If a franchisor decides to entrust the testing of its business format to a third party through a pilotage contract, it is important to take legal precautions to protect intellectual property, distinctive signs and know-how during the testing phase.
The pilotage contract must regulate the mutual obligations of the parties, providing for obligations of confidentiality and non-disclosure of the contents of know-how acquired during experimentation by the pilot. In addition, the franchisor must grant the pilot the right to use its distinctive signs, regulating the manner and quality standards of use.
The pilotage contract is atypical and not governed by the Civil Code or special laws, but the parties may enter into non-statutory contracts as long as they pursue interests worthy of protection under the legal system. Eventually, the natural outcome of the pilotage contract is the signing of a franchise contract between the same parties, of a longer duration and with economic obligations in the hands of the franchisee, but it is possible that the piloting is unsuccessful and the parties decide not to continue the contractual relationship.
Violation of the confidentiality obligation imposed on the “pilot” regarding the contents of the know-how acquired during the testing of the format in the pilot store may result in legal consequences for the franchisor.
The franchisor can legally protect itself by preventing such violations by entering into a pilotage contract that regulates the confidentiality obligations imposed on the “pilot” regarding the contents of the know-how acquired during the testing of the format in the pilot store.
In the event of a violation, the franchisor can claim compensation for any greater damage caused, where it has been contractually provided for.
However, the loss of know-how could represent such serious damage as to be almost irreversible. It is essential to prepare a policy for the protection of confidential know-how that is fit for purpose and effective.
The differences between the franchise contract and the pilotage contract can be summarized in the following points: