Franchise Agreements over the years have utilised a number of different techniques to ensure that franchisees actively drive their business. Many years ago franchisees were required to achieve a minimum turnover or benchmarks of sales for their franchise. In some instances these figures were artificially created levels which bore little resemblance to the anticipated potential sales for the franchisee's business.
There is always the real issue with new franchises (greenfield sites) in determining what is an appropriate level of turnover to be achieved out of a particular territory or site location. Many franchisors assist in the estimation of these budgets and these are sometimes reflected in the minimum turnover provisions or performance requirements in the Franchise Agreement.
The difficulty for franchisors is that this assistance can sometimes lead to, or be seen to be, a representation as to the potential turnover or expectations of turnover/profit within a location. Such difficulties and the issues associated with minimum performance were clearly outlined in the Leonard's Poultry case in South Australia. It has even been suggested that the insertion of a minimum turnover figure within a Franchise Agreement can constitute a representation as to the potential turnover within a franchise.
The old form of Franchise Agreement typically Provided that these minimum performance figures were increased in accordance with a CPI clause or fixed increase. These clauses were invariably ignorant the reality as to the potential increase in size of the business and failed to take into account market forces.
These provisions also had inherent problems in determining which sales figures or performance were to be utilised; for instance, a monthly, quarterly or yearly basis for calculating turnover or performance. In many cases the contracts were drafted and were open for dispute. Typically consequences for non-performance by a was termination of their franchise.
More sophisticated Franchise Agreements currently provide for a more flexible structure to identify non-performance by the franchisee. The modern Franchise Agreement incorporates provisions which take into account fluctuations in market conditions and the specific circumstances of the franchisee.
They also incorporate a counselling process which can result in re-education and training as well as the option to restrict the relevant franchise or, where the franchise operates with a territory, to reduce the size of the territory with termination as the last resort. Non performance by a franchisee is always a sensitive issue and termination should be seen as a last resort in all circumstances. Too often nonperformance is based on vague grounds. Difficult situations arise where a franchisee, whilst strictly in compliance with the Franchise Agreement, is not suitable to the franchise network. These create difficult situations of non-performance. In other words, they are not bad enough to terminate but they are not good enough to be a great franchisee. These are the most difficult cases for franchisors and the franchisees are often counselled out of the network.
The Franchise Code has adequate provisions dealing with non-performance and the ability of parties to address that through the mediation process if a party disputes a claim of non-performance.
The use of technical breaches of the Franchise Agreement to get rid of a non-performing franchisee should be seen for what it is, an attempt to abuse the relationship. There have of course been many cases dealing with purported technical breaches being exploited by the franchisor in an attempt to remove a franchisee perceived to be non-performing. Such conduct can be seen as being unconscionable.
Ultimately franchising should be seen as a partnership between the two parties and so the preferable response is an honest and fair attempt to resolve the issue of non-performance.
This article was written by Tony Garrisson, a Principal in the franchising and commercial division of legal advice franchise Mason Sier Turnbull.
This article appears courtesy of Franchising Magazine.20-Jun-2008