My October 24, 2018 post, entitled What is the True Contract Between a Franchisor and its Franchisees?, dealt with the unique nature of the legal and commercial agreement between a franchisor and its franchisees.
By its very nature, that agreement, which the courts now describe as a "relational contract", includes a mutual commitment to collaborate in which each party must play its role in such a way that the considerations behind the agreement are not voided or defeated by opportunistic actions on the part of either party (decisions made, or actions taken, in its sole interest without taking into account the interests of the other party). That commitment also (even if it is not set down in writing in the signed agreement) calls for maintaining a very high degree of good faith and mutual loyalty throughout the relationship.
There is therefore a mutual obligation to maintain a delicate balance between the entirely understandable objective of each party to increase its own profits and the obligation of each party to contribute to the ongoing collaborative relationship in which each of them must benefit.
In the medium and long term, the franchisor's success depends on the success of its franchisees, and, vice versa, the success of each franchisee is also largely dependent on the success of the franchisor … and of the other franchisees.
Another very specific aspect of the franchisor-franchisees' relationship lies in the presence of a third entity (even though, properly speaking, it is not a person) that is, in a way, "the elephant in the room": the franchise network as a whole (comprised of the franchisor, all of the franchisees, and other close collaborators of the franchise network, including major suppliers and advisors).
This franchise network is also where the interests of the franchisor and its franchisees must meet. Some of those interests will converge while others diverge.
By putting the interests of the franchise network as a whole at the centre of their respective decisions and actions, franchisor and franchisees adopt a common objective that will serve as a guide and as a kind of beacon throughout their relationship, for their respective decisions and actions.
This sounds all very well in theory, but what about in practice?
Notwithstanding these fine principles that lie at the heart of a strategic partnership between a franchisor and its franchisees, will each party to the franchise relationship, particularly during difficult periods, not have a tendency to give their individual interests precedence over those of the network as a whole?
Yes, and that is why it is important to incorporate certain mechanisms into the actual structure of the franchise network that help to ensure that the interests of the network as a whole remains the uppermost criterion for decision-making, both for franchisor and for the franchisees (individually and collectively).
There are several useful mechanisms for this purpose, one being the "Wise-Persons' Committee".
A Wise-Persons' Committee is a permanent (rather than ad hoc) committee whose members are individuals who:
- have a high degree of credibility within the franchise network (for which reason they are referred to as "wise persons"),
- are very familiar with the franchise network and are thus able to recognize where its best interests lie,
- are not then actively involved in the network, and
- have no personal interest themselves in the decisions and actions of the franchisor or franchisees or in the substance or outcomes of their recommendations, except for the sole objective of seeing the network succeed while continuing to adhere to its mission and values.
Most often, the members of a Wise-Persons' Committee are former franchisees who have achieved success, former franchisor's executives who have gained considerable credibility both among franchisees and with the franchisor, and/or experienced individuals who are, or have been, very close to the franchise network in one way or another.
The members of the Wise-Persons' Committee are appointed by a joint decision of the franchisor and of its franchisees (and not by the franchisor alone). It is very important that franchisees acknowledge that the individuals appointed to the committee are not dependent on the franchisor and have nothing to gain by favouring the franchisor or any other member of the network.
The primary role of a Wise-Persons' Committee is to provide, within a short time frame, the opinion of individuals who are recognized as "wise" and "neutral" to all members of the franchise network (franchisor's executives, franchisees, immediate partners, etc.), on any decision or action (whether by one or more franchisees or by the franchisor) that:
- creates a problem,
- seems to violate the "relational contract" between the franchisor and its franchisees or the mission and values of the franchise network, or
- does not seem to be primarily in the interests of the franchise network as a whole.
Even when no specific situation is put to the Wise-Persons' Committee, it meets regularly to keep up to date on developments within the franchise network and on the opportunities, issues, and challenges that arise along its way. The Committee will thus be prepared to act quickly when necessary, and its recommendations will be correspondingly better and more relevant.
The result of the deliberations of a Wise-Persons' Committee almost always takes the form of recommendations rather than decisions.
However, because those recommendations are ordinarily communicated to all the franchisees and to the franchisor, they carry definite weight within the network.
In a way, a credible and active Wise-Persons' Committee represents the collective consciousness of the franchise network, buttressing its mission and values and its common interests.
This is therefore a mechanism that, when properly organized, will afford very useful opportunities, in particular for ironing out problems, differences and disagreements within the network.
If they wish, the franchisor or one or more franchisees could even submit to the Wise-Persons' Committee some of the disputes that arise within franchise the network and that they seem unable to resolve themselves, in order to obtain recommendations from the Wise-Persons' Committee as to reasonable avenues for finding a resolution in the best interests of the network.
The experience of the committee members and the fact that they have no stake in the outcome mean that they bring a different perspective and are sometimes able to see the forest rather than just the trees. They are often in a better position to picture the longer-term consequences of a dispute for the network and to recommend fresh options for resolving it.
If the committee members also (by reason of their expertise and/or reputation within the network) have some influence over the parties to a dispute, they can also, in some cases, act as conciliators in order to facilitate a fair, and mutually acceptable, settlement.
Fasken has all the expertise and resources that are needed to advise you and support you in all aspects of the start-up, management and expansion of your network, including relations with your franchisees, everywhere in the world.