In his latest column for Business Advice, founding partner of Cubism Law and resident franchising legal expert Andrew Pena explores the options available to a franchisee when faced with abandonment by a franchisor, either at the outset or later on in the franchise relationship. Here are some of the key legal considerations.
(1) Has the franchisee been misled?
Franchise agreements typically impose very few obligations on franchisors. It is therefore not unusual for delinquent franchisors to be wholly ineffectual but still comply with the terms of the franchise agreement.
Even if the franchisor has complied with all of its contractual obligations, the franchisee may have remedies available to it as a result of representations made to the franchisee prior to the franchisee entering into the franchise agreement. If the franchisor made a statement of fact (or gave an opinion which was not reasonably held) – such as in respect of average earned income, level of support or likely costs – which was untrue and induced the franchisee to enter into the franchise agreement, the franchisee may be entitled to claim damages or rescission. Rescission seeks to undo the deal by putting the franchisee is the same position as if it had not signed the franchise agreement.
(2) Has the franchisor breached its initial obligations?
The franchisee will need to consider carefully the franchisor’s initial obligations under the franchise agreement. A franchisee should ask itself whether the franchisor has complied with all initial obligations under the franchise agreement. Typical initial obligations are likely to include:
• Initial training: What training is the franchisor required to provide to the franchisee and when and how was it provided?
• Premises and fit-out: What are the franchisor’s obligations to provide support and assistance in relation to locating suitable premises (providing selection criteria for premises, for example) and fitting out the premises (providing plans and specifications for internal layouts, for example)?
• Equipment: What are the franchisor’s obligations in respect of the supply of equipment, or advice and assistance in relation to obtaining the required equipment?
• Initial Launch: Many franchise agreements provide for the franchisor to assist with the launch of the franchisee’s business
• Products: What are the franchisor’s obligations to supply (or assist the franchisee to obtain the supply) an initial quantity of suitable products to allow the franchisee to start trading?
• Manual: What are the franchisor’s obligation in relation to supplying the franchisee with, or giving the franchisee access to, the manuals?
• Trademarks and branding: Does the franchisor own the trade mark it has licensed to the franchisee?
(3) Has the franchisor breached its continuing obligations?
After the franchisee has commenced trading, the franchisor’s obligations are typically limited. However, there may be obligations imposed on the franchisor that are enforceable. A franchisee should ask itself whether the franchisor has complied with all continuing obligations under the franchise agreement. Typical continuing obligations include:
• Products: What are the franchisor’s obligations to supply (or assist the franchisee in obtaining supply) of products for the franchisee’s business?
• Manual and system: What are the franchisee’s obligations to keep the manual and systems processes up to date?
• Marketing of the brand: What are the obligations of the franchisor to market the brand for the benefit of the network? Are there obligations to account to the franchisees in respect of a common marketing fund?
• Ongoing advice and assistance: What other obligations are imposed on the franchisor to provide ongoing advice, assistance or support to the franchisee?
It is not unusual for clauses that impose obligations on a franchisor to give the franchisor a significant amount of discretion. For example, a clause may provide that the franchisor will provide advice and assistance to the franchisee as franchisor considers appropriate. Such clauses that give the franchisor a discretion as to quality or frequency of support or assistance, or which are so vague that they do not carry any clear meaning, are generally difficult to enforce against a franchisor.
(4) What can the franchisee do?
If the franchisor has failed to comply with the obligations contained in the franchise agreement, whether in respect of the franchisor’s initial obligations or continuing obligations, then the franchisee may be entitled to terminate the franchise agreement and/or claim damages against the franchisor. This will require careful consideration of the legal and factual position especially since terminating a contract wrongfully can have very serious consequences.
Whether there has been a breach of contract or a misrepresentation, a franchisee may not have the financial resources to seek legal redress by challenging the franchisor in the Courts. However, it may be possible for a franchisee with a strong claim to obtain funding to enable it to pursue its claim against the franchisor. Alternatively, and if the franchisor is a member of the British Franchise Association (BFA), it may be possible to make a complaint to them via their mediation or arbitration schemes.
In addition, and if a franchisee believes that the failures are endemic to the business, it may look to build a coalition of other franchisees with similar issues so that it can approach the franchisor as a collective unit looking to open a constructive dialogue.
Franchising is just one way to achieve business growth. For something completely different that many small business owners may not have thought about, why not read our expert’s guide to invoice financing?
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