As a franchisor, it is crucial that you have a great negotiation strategy with a potential franchisee right from the start. Here, you should also understand what your legal obligations are and ensure you do not open yourself up to a legal claim down the line. This article will outline what legal goalposts you must negotiate between, and some tips for conducting franchise negotiations.

When Do Franchise Negotiations Occur? 

Negotiations will typically occur once you have sent the franchise agreement, the disclosure document and a copy of the Franchise Code to the prospective franchisee. The prospective franchisee has likely obtained advice from a lawyer or other professional advisors before negotiations begin.

However, in practice, negotiations can start much earlier than this. This is because discussions about alternate conditions to the agreement will occur. These are often discussed informally with a prospective franchisee, and often even before documents are issued. 

For example, you might agree with a prospective franchisee from the outset that you will grant a three-month royalty-free period to get their business up and running before you issue documents to them.

Informal discussions before documents have been issued are still subject to the laws concerning good faith and misleading or deceptive conduct.

Are There Legal Goalposts?

There are several laws relevant to franchise negotiations that could be important in future disputes. As a franchisor, you must handle negotiations in a way that keeps you firmly between the legal ‘goalposts’. These goalposts are legal boundaries that you must abide by when negotiating with your franchisees.

Unfair Contract Laws

Laws surrounding unfair contracts allow a court to determine that certain terms in ‘standard form contracts’ are unfair and, therefore, cannot be enforced.

A contract will be in a standard form where:

  • at least one party to the contract has less than 20 employees;
  • it is for the supply of goods, services or land;
  • the up-front value of the contract is under $300,000, or if the contract continues over one year, then under an up-front value of $1,000,000.

However, if your franchisees have a genuine ability to negotiate the terms of the franchise agreement, it is less likely the franchise agreement will be a standard form contract. Franchisees may request changes to the franchise agreement where terms of that agreement could be considered unfair under these laws.

Verbal and Written ‘Representations’

The Franchising Code prevents franchisors from inserting a legal right in your franchise agreement that waives any verbal or written promises you gave to the franchisee during early negotiations.

Some contracts include an ‘entire agreement clause’. This is where no other additional terms are able to form part of the contract. However, this will not prevent a franchisee from relying on something that was said to them but is not included in the final contract.

If you make any promises that are not in the contract, make sure to record them in the special conditions and warranties section of the franchise agreement. You could also record them in a separate document that both you and the franchisee would sign.

Good Faith

Both franchisors and franchisees must operate in ‘good faith’ in their dealings with one another. Good faith relates to standards of honest disclosure and fair dealing, which both parties must meet. 

Good faith applies to all aspects of the franchisor and franchisee relationship, including the early stages. You should demonstrate that you are willing to negotiate in good faith and ‘fair dealing’. This does not require that you act against their commercial interests, but you should generally avoid using your bargaining power in a way which would detriment the franchisee.

Misleading or Deceptive Conduct

In commercial transactions, it is unlawful for people to engage in misleading or deceptive conduct. This includes making misleading statements to encourage a person to enter into a commercial contract, such as a franchise agreement.

What you say, both verbally and in writing, in the early stages of the contract formation can be critical if a dispute arises in the future. If you make a statement which relates to a future matter, it could be deemed misleading or deceptive if you had no ‘reasonable basis’ for making the statement.

For example, if you show the prospective franchisor a profit number for similar stores which had been fabricated, this could be misleading and deceptive conduct.

Negotiation Tips and Tricks

If you conduct your negotiations within the parameters of the legal goalposts, you can implement any negotiation style you wish. However, if you are looking for some guidance on handling franchise negotiations, consider adopting some tips and tricks below.

Warranties and Special Conditions 

Rather than changing your contract terms directly, any agreed changes or other warranties should be set out in a warranties and special conditions schedule.

A warranty is an assurance you provide about your practices. There are often several warranties set out in the franchise agreement. However, during negotiations, a franchisee might request additional warranties to assure themselves that they are making the right purchase. 

For example, an additional warranty might be that “The franchisor warrants that it has no immediate plans to change the intellectual property of the franchise system”. 

special condition is a variation to the ‘standard’ terms the franchisor offers. A special condition may 

  • change; 
  • replace; or
  • delete a standard term entirely.

Accept Non-Controversial Requests 

In franchise negotiations, it is beneficial to accept changes the franchisee requests if those changes are relatively minor aspects and do not threaten your main contractual rights.

Agreeing to changes of this kind can show good faith and demonstrate that you are acting reasonably. 

If any disputes come up down the line, this will allow you to argue that you did not have unfair contract terms. Accepting simple changes can give you leverage or ‘stock’ when you need to push back on a more controversial request.

For example, when a prospective franchisee requests ‘reasonable notice’ before an inspection or audit, you should accept it.

Offer Alternatives

There may be times where you cannot accept a proposed amendment for one reason or another. Rather than refusing the request outright, consider if you can offer a more agreeable alternative. 

For example, a franchisee may request for you to remove an indemnity provision from the contract. An indemnity is a promise by one party to compensate the other party for loss or damage. Rather than refusing outright, you may want to consider offering to include a ‘carve-out’ to the indemnity. This limits its effectiveness in certain circumstances, such as where your own negligence causes the loss. 

Offering an alternative shows that you understand why the request has been made and have attempted to provide a solution.

Know When Not to Give

Sometimes, you simply cannot agree to a proposed amendment, and there are no suitable alternatives as a compromise. Some changes may fundamentally increase your liability or take away a crucial right in the franchise agreement. You should generally avoid compromising in relation to:

  • the inclusion of a personal guarantee;
  • a right to update the intellectual property;
  • a right to change the range of goods or services; and 
  • indemnities in favour of you.

There may be times where you need to refuse a request outright, without being able to offer an alternative. Here, provide reasons for why you cannot accept the request. This puts the franchisee in your shoes as they are forced to consider the risk the amendment would expose you to.

Key Takeaways

As a franchisor, it is important to remain within the legal boundaries when negotiating with a prospective franchisee. This includes ensuring that:

  • there are fair contract laws;
  • franchisees have the ability to negotiate terms;
  • you act reasonably and in good faith when negotiating; and
  • you avoid misleading or deceptive conduct.

If you follow these legal rules when negotiating a franchise agreement with a prospective franchisee, you will be free to implement your own personal negotiation style. Your personal negotiation style may include a few tips and tricks, including implementing warranties and special conditions, accepting non-controversial requests and offering alternatives. If you have any questions about franchise negotiations, contact LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page. 

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