Do Business Well

In a strictly legal sense, every franchise agreement is entered into between a franchisor and one specific franchisee. What is frequently overlooked, however, is the fact that three other parties will be affected, to a greater or lesser extent, by every such agreement. Unless the franchise agreement enables the franchisor to exercise adequate control over the way each franchisee exercises his rights and carries out his obligations, the entire network of company-owned and franchised stores, its suppliers and its customers could suffer from the actions of one errant franchisee.

• The franchisor, having invested much time and money into the creation of the franchise package, is entitled to protect the value of the brand and ensure its continued growth.
• Other franchisees within the network, in their efforts to maximise market penetration and business results, will rely on the reputation of the brand.
• The network’s suppliers, having entered into network-wide supply agreements, will expect each member of the network to meet its respective obligations arising from the supply of goods and services. Should, for example, one franchisee habitually default on payments, the credit rating of all other members of the network could be affected.

Guided by word of mouth and their own past experiences and influenced by the brand’s advertising message, customers tend to develop certain expectations when dealing with a brand. They may not know which store within a network is company-owned and which one is franchised, nor will they really care. They expect that the service experience offered under the banner of the brand remains consistent throughout the network, no matter where the outlet they frequent is located or who owns it. If this simple expectation is not met, the brand will suffer.

The spirit of the franchise agreement

Although we have said that the franchise agreement must enable the franchisor to protect the brand and exercise control over the performance of all members of the network, this legitimate requirement must be carefully balanced against the need to meet the long-term expectations of a dedicated group of franchisees. It follows that the franchise agreement must be seen to take the interests of both parties into account, certainly a deviation from the cut-throat world of commercial agreements in general, where one frequently comes across scenarios that expect everyone to fend for themselves.

One-sided agreements that patently fail to address franchisees‘ legitimate concerns are counterproductive at best, and may lead to the ultimate demise of a network. As soon as a franchisee gets the feeling that he is trapped in an inequitable agreement, he is likely to seek support from fellow-franchisees, and no confidentiality clause will be able to stop him from doing just that. Before long, several franchisees will group together to challenge the legal validity of the agreement. Once this happens, discontent amongst franchisees is likely to spread, resulting in an irreversible breakdown of trust. Under such circumstances, no franchise network can hope to operate successfully for very long.

Written agreement

The franchise agreement describes the terms of the arrangement between the franchisor and the franchisee and sets out the respective rights and obligations of both parties. While it would be correct to say that before a court of Law, an oral (also known as a verbal) agreement will be considered as binding, a franchise agreement must always be in writing. The reason for this is, once again, the complexity of the arrangement.

Should an oral agreement form the basis of the arrangement between the franchisor and the franchisee and a dispute arises, the parties would, firstly, be unlikely to remember precisely what has been said. Secondly, it could be difficult to prove anything. The word of the one party would stand against the word of the other. Given the substantial investment most ^franchises require, this would not be a satisfactory state of affairs.

It should be noted that both the FASA Code of Ethics and Business Practices and the Consumer Code for Franchising require the franchise agreement to be in writing.

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