Franchise royalties potentially at risk, report Donaldson Walsh franchising lawyers

Franchising lawyers at Donaldson Walsh Lawyers have highlighted a recent decision in the New South Wales Court of Appeal that questions the validity of purportedly reasonable estimates of royalties and fees by a franchisor.

The case demonstrates that if a franchise agreement allows for reasonable estimates of sales revenue to be made by a franchisor for the purposes of calculating franchise fees the franchisor will, if the estimates are challenged, have the onus of demonstrating that any estimates made by it are genuinely reasonable.

Donaldson Walsh franchising lawyers advise that franchisors should review the provisions in their own franchise agreements in light of this development, and ensure that their right to franchise fees is protected as much as possible.

Specifically, franchisors need to ensure that their franchise agreement clearly outlines what to do when a franchisee does not provide sales reports. Specific clauses that outline the procedure to be undertaken to determine the payment due to the franchisor should be included in the franchise agreement.

If the clause in the Franchise Agreement states that a reasonable estimate of sales or franchise fees can be made, then Donaldson Walsh franchising lawyers note that the franchisor may be in for an expensive court case as expert witness evidence will need to be obtained to prove the fees due.

Alternatively, franchisors can elect to set franchise fees, at least post termination, by reference to a fixed formula or amounts. Provided that this is not dependent upon an assessment of actual sales or estimated actual sales, proving the loss will then be far less expensive, though the final amount may not be as accurate as that arising from a full forensic investigation.

Another alternative could be to allow for a full audit of the franchisee’s business, at the cost of the franchisee, where reports are not provided for an extended period.

The key for a practical franchisor here is that the net amount received in the case of such a dispute is as high as possible, while avoiding any claim that a fixed formula calculation is an invalid ‘penalty’ payment because it does not constitute a fair estimate of actual damages.

Donaldson Walsh franchising lawyers suggest that it might be prudent for a franchisor to seek to write a ‘reasonable estimate’ of loss into a franchise agreement from the start, and use that later when or if needed.

Franchising lawyers at Donaldson Walsh are available for consultation and legal advice on this and any other aspect of franchise law.