Advice for franchisors: how to ensure franchisee exits are on terms that work for you
In this blog, our franchising specialist Roz Goldstein looks at some of the most common “escape routes” used by franchisees to avoid their obligations under franchise agreements.
By being aware of these, a franchisor can ensure they put the right protections in place from the start of the relationship and avoid messy break-ups later.
It is amazing how often a franchisor finds themselves unable to enforce their legal rights because of basic paper-trail failings.
It doesn’t matter how well drafted the terms were if the franchisor can’t put their hands on the signed franchise agreement!
Even if the document can be located, it may not have been signed by both parties properly or, at all. Alternatively, if the agreement is signed, we sometimes find that relevant details are missing.
While these issues may not be fatal, they certainly cause unnecessary complications and can weaken the franchisor’s bargaining position, putting them on the back foot in the event of a dispute.
Some of the most important terms in any franchise agreement are the restrictions on the franchisee which apply after the termination of the agreement – the so-called restrictive covenants.
However, for these to be enforceable, they must be drafted reasonably. Terms which a court considers are too wide – be that in respect of the length of time they apply to the franchisee after their exit, the scope of the activities they are intended to cover, or the geographical area to which they apply – will be struck out.
Where restrictive covenants have not been properly thought about and tailored to the agreement, lawyers acting for the franchisee post termination can often find ways to pick them apart.
A franchisor is than faced with the difficult question of whether to risk the very substantial cost of seeking an injunction to prevent competitive activity.
There have been some recent developments in the field of “good faith” obligations in franchise agreements, which not all franchisors may be aware of.
In the case of Bates v Post Office Ltd (No 3) the court made it clear that the contract between a franchisor and a franchisee is a “relational” one. This means the franchisor is subject to duties of good faith (or “fair dealing”), transparency, co-operation, and trust and confidence.
The parties must refrain from conduct which would be regarded as commercially unacceptable by reasonable and honest people. The court stressed that it is not enough just to be honest.
This means that great care needs to be taken when drafting clauses relating to “good faith” in franchise agreements as it’s easy to get tripped up on this and then find that it is used against you in an exit dispute.
Franchisees frequently use the doctrine of misrepresentation as a defence to claims by the franchisor that they are in breach of agreement. This is because a successful misrepresentation claim will enable them to walk away from (rescind) the franchise agreement and their obligations under it.
Misrepresentation can occur when a false statement of material fact is made by one party, and this induces another party to agree to the terms of a contract.
Consequently, franchisors need to pay careful attention to “version control” in franchisee recruitment materials, to ensure these remain accurate. They also need to stick closely to a script for all discussions with prospective franchisees. This should help mitigate the risk of a franchisee crying “misrepresentation” after the event.
How can we help you?
Goldstein Legal is part of nexa law. They are franchising solicitors who offer a range of legal services for franchisors and franchisees, regularly advising both businesses and individuals.
Do get in touch with any of our friendly team for a confidential, no obligation chat to find out how we can help you.