I’m a Franchisor. How Should I Manage Franchise Disputes?

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Table of Contents

• Don’t Overpromise and Underdeliver
• Provide Adequate Support to the Franchisee
• Understand Your Obligations Under the Franchising Code
• Regularly Communicate With Your Franchise Network
• Seek Advice Before Terminating a Franchisee

As a franchisor, it’s important to avoid franchise disputes and ensure all franchisees are working to maintain — and even improve — your brand’s image. Overlooking issues with individual franchisees because of time constraints is tempting. But if left unaddressed, small issues can escalate quickly. We set out some strategies for franchisors to manage franchise disputes when they arise.

Don’t Overpromise and Underdeliver

It’s easy to get carried away when pitching the franchise opportunity to a new franchisee, but if you oversell and don’t deliver, a new franchisee may feel disappointed.

Whether you hint at an expectation for success or explicitly project a minimum revenue figure, it’s best to avoid doing so for two reasons:

1. the disclosure document requires you to disclose the basis for providing any projections; and
2. it’s speculative.

Although you can provide historical sales figures, providing a spreadsheet of sales projections or helping a franchisee with their budget by putting in sales figures is risky. A franchise dispute may arise if you don’t meet these expectations, and the franchisee may feel betrayed which can break trust in the commercial relationship.

If you oversell the opportunity, you are potentially engaging in misleading and deceptive conduct. The Australian Consumer Law prohibits misleading and deceptive conduct. For instance, statements about the franchisee’s expected growth or profits when the franchisor has no reasonable grounds for making the statement may be misleading and deceptive. 

If you engage a business development manager (BDM), recruitment manager or consultant, clearly set out the process of recruiting franchisees. As the franchisor, you may be jointly responsible if the BDM misrepresents the opportunity or exaggerates claims without appropriate management. It’s sensible to avoid paying your BDM purely via commission as soon as a sale occurs. Doing so incentivises the person to push for quick sales rather than recruit for long term franchisees. 

Quick Tips

• Be careful about the way you sell your business model. 
• Do not provide projections and future models showing optimistic future sales and profit figures. It is best to provide historical data or nothing at all.  
• Appropriately manage your BDM. 

Provide Adequate Support to the Franchisee

Problems can arise if a franchisee feels like they aren’t receiving the support they expected. Ensure that you have good systems in place and provide ongoing support to foster a sense of partnership. The franchise agreement will set out obligations relating to franchisee induction training in the business’ systems and processes.

Quick Tips

• Go through your franchise agreement and operations manual carefully to understand the system training processes.
  
• Check your franchise agreement regularly and only include obligations that you can carry out. Remove any obligations you can no longer uphold.
• Communicate your induction training, ongoing support and procedures honestly.
• Do not underestimate the positive effect of regular communication with your franchisees. Something as simple as a monthly email update can make a franchisee feel like a part of an integrated network.  

Understand Your Obligations Under the Franchising Code

Franchise disputes may arise if you vary a franchise agreement.

Franchisors typically draft their franchise agreements so they can issue the ‘then current’ version of the franchise agreement when there is a renewal or assignment. There are, however, restrictions on how much a franchise agreement can differ on renewal or assignment. For instance, franchisors can’t substantially change commercial terms such as rebates, fees or royalties.

Broadly speaking, new laws relating to unfair contract terms may apply. A clause may be considered unfair if:

• it would cause a significant imbalance in the parties’ rights and obligations; and
• it’s not reasonably necessary to protect the franchisor’s legitimate interests; and
• would cause detriment to the franchisee.

Quick Tips

• Be aware of your obligations arising under the Franchising Code and relevant law.
• Be very clear in the Franchise Agreement regarding how and when you can vary the terms of the Agreement.  
• Before renewing or assigning the Agreement, discuss proposed changes in detail with your franchisees, so they are not surprised by any changes when they occur.  

Regularly Communicate With Your Franchise Network

Good faith is a broad issue in franchise disputes that can overlap with any of the above issues. It is a general obligation to act honestly and fairly in all aspects of the franchisee/franchisor relationship. It is particularly relevant to consider since the 2015 update to the Franchising Code of Conduct introduced a specific good faith requirement applicable to both parties in a franchise agreement. Whether or not a party has acted in good faith depends on whether they acted honestly, arbitrarily and cooperatively is considered.

Quick Tips

• Regularly use open channels of communication.  Give reasonable warning and explain potential changes that you want to implement.
• When a problem arises, discuss the issue in a non-confrontational manner, instead of taking drastic and hostile action.

Seek Advice Before Terminating a Franchisee

Another common issue that arises is about exiting the franchise relationship. One party may argue, for example, that the other doesn’t have the right to invoke the termination clause in the franchise agreement. Once again, the Franchising Code has several requirements relating to these disputes. For example, under the Code, a franchisor is required to notify a franchisee of a breach, and allow a reasonable time for it to be corrected, before terminating the agreement. 

Quick Tips

• Obtain clear advice regarding the appropriate way to terminate a franchisee and issue a Code-compliant breach notice.
• Always consider other commercial options (including buy back or facilitating a sale) before jumping to termination. Meet with the franchisee to understand why a breach has occurred before issuing breach notices and terminating the franchise. It may be possible to facilitate a sale and benefit all parties.

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It’s best to adopt a proactive approach when managing your franchise relationships to reduce the likelihood of disputes arising and resolving them quickly when they do. You can avoid many issues at the outset by addressing the issues with the franchisee as soon as they arise. If you have any questions or need assistance resolving a dispute with your franchisee, get in touch with LegalVision’s franchise lawyers on 1300 544 755.