WHAT IS A FRANCHISE?
A large company, known as the franchisor, creates a business model, promotes the brand to the public, and permits individual location owners, known as franchisees, to operate under the brand name in exchange for fees. This arrangement works to the benefit of the franchisor as it allows the chain to expand quickly, while reducing the investment on the franchisor’s part. It is advantageous for the franchisee because the franchisee can make use of the franchisor’s business knowledge, marketing efforts and established brand name.
WHY IS FRANCHISE LAW SPECIAL?
Some special considerations apply in franchise law. First, there is normally an imbalance in power between the franchisor, which may be a universally-recognized international chain, and the franchisee, an individual location owner. Secondly, in order to protect its brand, the franchisor has extensive control over many aspects of the franchisee’s business, including the products sold and the prices charged.
For these reasons, the law imposes special requirements on franchisor’s to provide information to franchisees and to act fairly in dealing with franchisees.
THE FRANCHISE AGREEMENT
The relationship between the franchisor and the franchisee is governed by a contract called the franchise agreement. The franchise agreement sets out the obligations of the franchisee, such as paying franchise fees to the franchisor and running the business in accordance with the business model established by the franchisor (ie. preparing the food in exactly the same manner as every other location), and the obligations of the franchisor, such as promoting the brand and helping to train the franchisee and the franchisee’s staff.
THE FRANCHISOR’S DISPUTE-RESOLUTION OPTIONS
If the franchisee fails to comply with the franchise agreement, the franchisor has several options:
Mediation/Arbitration: The franchise agreement may require that disputes be resolved through mediation or arbitration. Mediation involves a meeting between the franchisor, the franchisee and an independent third party, called the mediator, who will try to help them to agree on a settlement. Mediation is voluntary where the mediator does not have the power to compel either the franchisor or the franchisee to accept a resolution.
Arbitration is similar to mediation, except that the role of an arbitrator is more like a judge since the arbitrator may make decisions. The main difference between an arbitrator and a judge is that the franchisor and franchisee, rather than the taxpayers that pay a judge pay the fees of an arbitrator. Mediation and arbitration can be advantageous to the franchisor in that they allow the dispute to be resolved more quickly than a lawsuit and that the decision will be kept confidential. If the arbitrator decides that the franchisor did something wrong, other franchisees will not find out and use this against the franchisor.
Termination: The franchise agreement will likely give the franchisor the option of terminating the agreement, meaning that the franchisee will no longer be permitted to operate under the franchisor’s brand. In order for the franchisor to be allowed to terminate the agreement, the franchisee’s breach of the franchise agreement will need to be significant and the franchisor will likely be required to first give the franchisee the opportunity to fix the problem. The franchisor should consider that termination may lead to a lawsuit against the franchisor by the franchisee.
Non-renewal: Instead of terminating the agreement, the franchisor may choose not to renew the franchise agreement once its scheduled term expires. This option is advantageous in that it is less likely to lead to litigation, but may be less than ideal depending on how much time remains prior to expiry of the franchise agreement.
The franchisor may also sue the franchisee for the financial losses it has suffered.
The franchise agreement therefore allows the franchisor to select the most advantageous option, depending on its objectives and assessment of the risks.
If you require assistance with any franchise law issues, please feel free to contact us.