It is a truism that the speed of the changes taking place in business and the business world is constantly increasing in all sectors of the economy. As a result, business contracts, including franchise agreements, need to be constantly adapted to those changes.
This is why a franchise agreement should be revised every two or three years in order to stay current and reflect the changes occurring. In this bulletin, you will learn more about certain practical and useful clauses that should be included in a franchise agreement.
Do they appear in yours?
Continuation of the Business Relationship after the Renewal date or After the end of the Contract term
Since franchisor and franchisees are often very busy, some of the formalities stipulated in the franchise agreement are sometimes not followed to the letter within the times it provides (particularly when those times are somewhat unrealistic).
It is therefore quite usual for franchisors to find themselves facing situations where a franchisee or franchisees continue to carry on business within the network after the renewal date of their franchise agreement when the prerequisites for renewing it (including the requirement that a new, updated contract be signed before the beginning of any renewal period) have not yet been fulfilled. In other cases, franchisees continue to operate their franchises after the expiry of the term of their franchise agreement, with the permission or acquiescence of the franchisor, while a new agreement is still being negotiated and has not yet been signed.
Without a clause dealing specifically with what happens in such cases, the legal consequences of the situations are complex and are often not in the best interests of the franchisors.
It is therefore appropriate to prevent situations like this, and that can be done by:
- making sure that all franchisees are bound by written franchise agreements that are signed and are in effect, and
- for cases that manage to escape the franchisor's notice, by including a clause in the contract that clearly addresses what happens to the parties' rights and obligations when the franchisor-franchisee business relationship continues after the end for any ongoing term provided for in the written contract, and how the franchisor can terminate that relationship.
Electronic and IT Platforms
Electronic and IT tools are becoming increasingly commonplace in the franchisor-franchisee relationship.
For example, some franchisors no longer have a printed operation manual; instead, they rely on modules available to their franchisees on an electronic platform. These modules are also increasingly in the form of audio or audiovisual files rather than text.
Similarly, with respect to the financial reports and information that franchisees are required to submit, some franchisors today have replaced written reports with real-time access via computer to their franchisees' computerized accounting systems.
Even for inspections, growing numbers of franchisors are now using remote access tools (access to security cameras and through interaction with the network's customers on social media being now two of those methods) to find out what is happening in the franchised sales outlets.
For most of these new tools, there needs to be appropriate clauses in the franchise agreement, dealing specifically with the necessary compatibility between equipment and systems, remote access at all times, access and sharing permissions, and so on.
For example, the clauses relating to the operation manual have to be adapted when the manual is available only via computer and the clauses concerning the reports to be submitted by the franchisee also have to be seriously reviewed when the franchisor has direct real-time access to the franchisee's accounting and financial systems.
It will be difficult to impose on a recalcitrant franchisee obligations that are not set out in the franchise agreement.
Social Networks and Online Sales
Social networks and online sales are unavoidable facts of life in numerous types of businesses.
For some franchisors, social networks are the main way, and often even the only way, to reach certain categories of customers today (in particular millennials).
The time has passed when these tools can be left without rules, and all franchise agreements should now include a few specific provisions regarding the use of social media by the franchisor or a franchisee.
This is just as true of online sales, whether by the franchisor or by a franchisee.
Franchisee Succession Planning
Almost all franchise networks today have to deal with two major challenges: labour shortages and franchisees' succession planning.
When it comes to succession planning and new management and ownership of franchisees, the vast majority of franchise agreements are currently either silent or contain very few useful provisions regarding this important challenge.
All that we normally see are clauses dealing with the transfer of interests in the franchisee (such as the obligation to obtain the approval from the franchisor, a right of first refusal, a process for approving the transferee and the transaction, and, obviously, the transfer fees).
With the growing importance of the issue of succession planning and new management and ownership of franchisees, now is the time to better address this topic in a franchise agreement.
For example, certain rules can be included in the franchise agreement a process for succession planning and new management and ownership, information sharing between the franchisor and the professional in charge of the process (together with a confidentiality undertaking), and an opportunity for the franchisor to adjust the assignment and transfer clauses provided for in the franchise agreement to facilitate the implementation of an orderly succession plan (for example, by waiving, for an agreed period and on agreed terms, its first refusal right, by reducing the transfer fee and by pre-approving, on certain terms and for an acceptable time, certain potential transferees). This process can be organized at the initiative of the franchisee or at the franchisor's request.
If you would like to learn more about succession planning, we invite you to read the bulletin entitled "The 'designated successor' clause: a valuable tool for better succession planning".
Like most of the other clauses in a franchise agreement, these clauses must be drafted to reflect the needs and particular features of each franchise network.
Judicial District for Bringing Action
Another practical and useful clause in a franchise agreement is the clause conferring jurisdiction to the courts of a judicial district specified in the contract in the event of a dispute between franchisor and franchisee.
In the absence of such clause, the general rule (to which there are several exceptions), at least under the Quebec Code of Civil Procedure, is that a legal action must be brought before the courts of the judicial district in which the defendant (the party being sued) is domiciled.
Because many franchisors seek to expand their franchise network throughout the country, this means that an action against a franchisee in Gaspé, Québec that fails to abide by its contract would have to be instituted in the judicial district of Gaspé, Québec.
The obligation to sue a franchisee in its own judicial district involves significantly higher costs for the franchisor (in particular for the travel expenses of its representatives and experts) and may also mean the franchisor having to choose between:
- retaining local counsel practising in the franchisee's judicial district with whom the franchisor is much less familiar (and who might also be less familiar with franchise law, the franchisor, how the franchisor operates, and its franchise agreement), or
- having to also bear significant travel expenses for its usual counsel.
It is therefore wise to avoid these issues by simply stipulating in your contract that, subject to any applicable franchise laws or regulations, judicial recourses between franchisor and franchisee must only be brought before the courts of the judicial district specified in the contract (which is often the franchisor's, or the franchisor's attorneys, judicial district).
These few clauses represent only a small sample of clauses that can be practical, useful and valuable to any franchisor. There are many more to consider!
Fasken has all the necessary expertise and resources to help you draft agreements that are complete and appropriate and that properly protect your rights and avoid potential pitfalls.