The franchise relationship – what to do when things turn sour

A franchise is a special kind of long-term partnership: it is, of course, a legally binding arrangement, and yet its day-to-day operation relies heavily on an element of mutual trust.

A marriage, of sorts

Typically, both partners are very enthusiastic at the outset and try hard to make things work well, but when either party begins to take the other for granted the relationship can easily drift.

Then, when problems arise, the temptation to just blame each other is sometimes too hard to resist...

If a franchise sounds very much like some modern marriages, that's quite a helpful working analogy when trying to understand franchise disputes. 

The ‘pre-nup’

Though franchise arrangements occur in many types of business, the standard terms of any agreement are likely to adhere closely to the British Franchise Association (BFA) model contract. This begins by setting out the intellectual property assets the franchisor proposes to allow the franchisee to benefit from, such as a trade name and logo, a proven business system, access to copyrighted sources and similar privileges.

Importantly, the contract will specify what rights the franchisee will be granted to exploit this intellectual property for business purposes, and may, for example, apply some geographical restrictions.

The duration of the agreement will be stipulated – often a five-year term – and there is usually provision for the franchisee to opt to renew the franchise. Any support services the franchisor promises to supply, and the franchisee's various business obligations – for example maintaining specified operational standards – will all be carefully detailed.

Finally, the contract deals with events which end the franchise agreement and their consequences: provisions for the sale of the business; any rights to assign the franchise and/or realise franchisee's assets upon death; and provision for contract termination by the franchisor and any subsequent restrictions placed upon the franchisee.

In addition, the agreement will set out the terms of arbitration available to both parties to resolve some types of franchise dispute. 

The arguments

When disputes do occur, this is often because the franchisee's business has perhaps grown and evolved to a point where the franchisee believes the franchise is no longer a valuable asset.

Any move by the franchisee to breach the agreement, for example setting-up a fresh business to maximise returns without franchise restrictions, challenges the core concept of a franchise contract and will be opposed by the franchisor.

Difficulties may also arise where a business fails. Here, the insolvent franchisee has much to lose and often blames the franchisor for the demise – with or without justification. Common allegations accuse the franchisor of misrepresenting business prospects or failing to comply with contractual obligations.

Similar conflicts of interest emerge where a franchise agreement expires with no renewal provision and key restraints prevent the former franchisee from trading independently. 

The break-up

Where a franchisor believes a franchisee has tried to circumvent the franchise for gain, the franchisor often resorts to litigation as a high-visibility option designed to preserve franchise integrity.

In most other circumstances both parties are usually seeking a commercial resolution without recourse to expensive litigation.

The BFA helpfully conceive and rank escalating resolution options as: informal conciliation, mediation, arbitration, and finally litigation. Though they have no formal powers, the BFA can facilitate constructive informal conciliation between parties. This light-touch review process is sometimes enough to persuade parties to reconsider and move matters forward.

Mediation is a shade more formal, though still voluntary and non-judgemental, and involves structured negotiation via an independent mediator with costs usually split between the parties. No awards are made, but any written settlement outcomes are binding on both parties.

Arbitration is a step nearer formal litigation. Under the BFA's scheme, a knowledgeable, BFA-appointed arbitrator controls the court-like procedure and makes an enforceable decision – a process involving fees and awards, and often apportioning costs. As with litigation, an arbitrator’s decision may be subject to certain rights of appeal.

Think it over

All parties should be well informed by good legal advice before advancing costly franchise disputes.

Franchisees with legitimate grievances are in a stronger position if others within the franchise group are raising similar valid concerns, and in such circumstances it can often be advantageous to join forces to fund any proposed litigation.

Any 'amicable divorce' between franchise partners should incorporate a carefully written agreement addressing the termination.

Franchisors will seek to preserve their intellectual property assets, for example preventing the franchisee – as a prospective competitor – unduly profiting from privileged access to trade secrets, and will be anxious to maintain any customer goodwill the business has accumulated. 

Franchisees in turn will naturally be determined to limit any unwarranted restrictions on their ability to continue to trade and earn a living. 

An acrimonious ending benefits no one, and though litigation can be ruinously expensive, a tortuous arbitration process is costly too. Both parties have much to gain from a clear-headed, commercial resolution to franchise disputes as a pragmatic alternative to litigation and its attendant, and sometimes unforeseen, consequences. 

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