Making the most of thefranchise agreement

The Franchise Council of Australia is a not for profit membership organisation that is the peak body representing the franchising sector in Australia.

Are franchise agreements simply different in degree

from traditional forms of contract? Or are they

something entirely new? If they are different, what

does it mean for franchisors and for franchisees?

What are the implications for regulators making and

enforcing laws that relate to franchise contracts? What are the

principles that should be applied by courts seeking to interpret

contracts in light of such regulation? The practical implications of

the ongoing research into these questions, while they are slow to

emerge, can be useful.

Think about the last time you bought a house, one that you really

wanted to live in. Maybe when you first saw it you weren’t sure.

Maybe it took a little time for you to commit. But once you did, once

you knew in your heart that it was the house for you, you were probably

putty in the seller’s hands. And if the seller knew it, he or she

may well have taken advantage. Fortunately the sale of a house is a

discrete transaction, a one-off deal; one of its saving graces is that

most of the time you never see the other side again after settlement.

Franchise agreements are not the sort of one-off deal, like the

sale of a house, upon which concepts of contract in the common

law have traditionally been based. While a house sale is a discrete

contract, a one-off, franchise contracts are relational contracts,

that is, they concern long-term relationships. There are parallels to

marriage and family law, joint ventures and employment contracts,

even sharecropping arrangements. Franchise agreements can

borrow from all these other arrangements, and other complex

business arrangements can borrow from franchising. In fact, franchising

is not only charting new territory in the business disciplines

of management and marketing; it is revealing emerging paradigms

in the law as well.

Relational contracts are different from discrete contracts in

two fundamental ways. First, they must be flexible enough to

accommodate change. Practitioners draft contracts to address

issues as specifically as possible, but they cannot anticipate

every contingency in a long-term business association. Many

aspects of the franchise relationship change over time. Highly

specific, rigid contractual terms are incompatible with the flexibility

necessary to maintain the parties’ relationship over the

duration of the agreement. Second, relational contracts must

balance the needs of both sides in the relationship. If one side

takes unfair advantage in the negotiation of the agreement, the

resulting one-sided agreement can undermine the relationship

permanently. While the side that takes advantage may believe it

is making a better deal for itself, it’s not. If the relationship suffers

in franchising, both sides suffer.

Flexibility or uniformity?

Creating contracts that accommodate change is not a new idea,

but it is an art that requires knowledge and skill of the tools of

contract, as well as a thorough understanding of the franchise

relationship. Researchers in the US continue to debate the degree

to which the franchise agreement is negotiable. It is true that franchisees

should beware of the franchisor who is overly willing to

make concessions. In the interests of economy, certainty and

control, the franchisor will want to maintain as much consistency

as possible in the basic agreement. Uniform agreements may also

protect the franchisor from accusations of treating individual franchisees

unfairly. This is not to say, however, that there is no room

for negotiation in the franchise agreement.

The franchisor will certainly be less committed to some contract

terms than others. According to a recent study in the US based

on a sample of 170 franchise contracts, contract terms in franchising

were often determined in a haphazard way. Franchisors

identified a few key requirements, but commonly left much of

the contract to be filled in with precedent. Imitating what other

franchisors have done was often not the best solution for their

situation. The provision in question may not have been appropriate

in the first place. In one case a franchisor copied another

major franchisor’s policy regarding exclusive territory, not realising

that the provision had resulted in chronic litigation for the

first franchisor.

Uniformity in franchising has long been considered a crucial

ingredient to success, but as the sector matures and our understanding

of franchising grows, we can afford to take a more

nuanced view. We must determine which parts of the agreement

are non-negotiable, and when and in what circumstances other

aspects of the agreement can be adjusted for the benefit of the

relationship. Ultimately, the contract is part of the product the franchisor

is selling. As Jim Penman wrote in Surprised by Success,

“It has to be an offer too good to refuse.”

Control or balance of power?

Power imbalance is present in every relationship. The more

powerful party is usually the one who can walk away, the one with

the least to lose. This is a matter of perception. Many people

would say the franchisor has the power in franchise negotiations;

it’s the franchisor’s business, the franchisor draws up the contract,

the franchisor writes the operations manual, and so on. In many

ways the franchisor does have power, but franchisees have

power, too. Franchisors refer to franchisees as prospects; they

want to make the sale. There are other franchisors out there. But

good franchisee prospects are in short supply in Australia.

A franchisor can’t make an offer ‘too good to refuse’ unless s/he

knows what the other side wants. Accommodating needs requires

maximising communication among parties. One study identified the

four factors critical to the long-term stability of a franchise as follows:

› the franchisee’s perception of the quality of service delivery by

the franchisor

› flexibility in system administration

› adequate financial returns from the relationship

› a perception that the franchisor resolves disputes in a quick,

eager and fair manner.

The franchisor has both the opportunity and the responsibility

to set the tone from the outset. If a pattern is established

from the start that the franchisee can rely on the franchisor’s

quality of service, fairness and flexibility, the franchise is more

likely to succeed.

Franchisees, then, are justified in seeing themselves in a position

of power. They can ask for more favourable terms in the

contract. Hammering out a better deal can create a win for both

sides. And it’s a valuable exercise for a franchisee to find out

early whether s/he’s dealing with a franchisor who is willing to

listen or one who isn’t. For the franchisor, a position of power

shouldn’t necessarily translate to control. A franchisor who is

willing to ease up on the reins a bit may find a better rapport with

a franchisee that can maximise returns. Just as a skilful rider

must give a good horse the latitude to perform at its best, a franchisor

can get a better result by sometimes giving an

enterprising franchisee greater latitude to exercise his or her own

judgment and expertise.

There are many techniques that can help the franchisor and franchisee

communicate more effectively in negotiating a flexible

agreement. The adversarial approach that is often taken by legal

counsel can get in the way of better mutual understanding between

the parties. This is particularly true where the solicitor lacks a thorough

understanding of both sides of the franchise relationship. As

many solicitors tend to specialise in representing either franchisors

or franchisees, thorough understanding of both sides is probably

the exception rather than the rule. Solicitors should therefore be willing

to listen to clients’ needs, and to counsel them accordingly. They

should not insist on provisions or precedent that serve no relevant

purpose, or worse, are damaging to the franchisor-franchisee relationship.

Counsel for the franchisee should not be heard to say, “this

is the way it’s always done – it’s non-negotiable”, refusing to negotiate

as far as the client would like on a point in the client’s behalf. In

negotiation circles, this is known as negotiating with yourself. Your

lawyer should be negotiating with the other side, not with you.

The contract is one part of the product when you enter a franchise

agreement. As a franchisee, you should kick its tyres, find out as

much as possible about how it works, and try to get what you

want. For the franchisor, particularly in business format franchising,

the contract can be an important sales tool; it can signal to

prospective franchisees that the franchisor’s entire package is an

attractive one. It sets the tone for the relationship, even if you’re

lucky enough never to have to refer to it again.

More research is needed to enhance our understanding of the

franchise relationship and the function of franchise agreements

and ancillary agreements. There is no universal formula for

success; each relationship has to find its own formula. Until we

decipher all the mystery in human relationships, be they business

or personal, good communication is essential. _

Elizabeth Spencer is a lecturer in the School of Law at

Bond University, Queensland. You can contact her on

(07) 5595 2218, email liz_spencer@staff.bond.edu.au.