The legal battles between franchisors and the franchisees accusing them of unfair franchise agreements have stirred up debate around the matter
The recent Fairfax investigation in Australia has led to discussion among some Australian politicians and legal experts with regard to the fairness of franchise agreements and the ability of the franchisee to exit them when things aren’t going well. As an international businessman I’ll be watching this with some interest and have seen some universal principles in this story, which have given us reason to talk about why agreements are as they are and what happens when things go wrong.
The fairness of franchise agreements is difficult to understand for a sector outsider. Most legal agreements will have some balance to each party involved in them. However, franchise agreements are different and with good reason. The parties to the agreement, the franchisor and the franchisee, do not have equal investments or equal risks. It’s for this reason that franchise agreements aren’t equal and should be weighted in favour of the franchisor and it’s in the franchisee’s interest that it is.
Franchisors have to protect their brand that all franchisees in the network use. Franchisors also have to make significant investments in time and capital to prove their concepts, design their businesses and to put a support structure in place for franchisees. These investments often come long before franchisees’ revenue brings a return.
This need to protect is one of the main reasons the obligations on a franchisee in the agreement are far greater in number than those on a franchisor. It’s in the franchisee’s interest because the investment of every single franchisee could be damaged by the reputational harm caused by a single franchisee in the network not running their business correctly. So the franchise agreement protects both the franchisor’s and every franchisees’ investment against the actions of a single rogue.
Yes, agreements should be fair but they should also be weighted in favour of the franchisor. Although, this can lead to misunderstanding from non-franchise people who may feel there should be greater balance in an agreement. It also creates the potential for a truly unfair agreement to be explained away as normal. That's why it’s important for anyone considering signing a franchise agreement to seek legal advice from a solicitor who is experienced in franchising and franchise agreements. One good way to ensure that your solicitor knows their stuff is to look at bfa-affiliated solicitors.
Remember that the agreement is there as a last resort if things go wrong. In my experience, the only people who win from legal battles are solicitors. It’s in everyone’s interest that disputes are resolved through communication and, if necessary, mediation.
There have also been instances in the UK in the past when politicians have looked at franchising. As a lesson to the Australians, in 2006 there was a Westminster hall debate on exactly this subject. The MPs’ verdict was that franchising made a vital contribution to creating successful businesses and also that the bfa played a valuable role in the UK in regulating the industry.