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Bulletin | Article

A Revolutionary Approach to Drafting a Franchise Agreement: The Relational Contract

Fasken
Reading Time 6 minute read
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Franchising Bulletin

The global health crisis that we are all experiencing today presents a unique opportunity to review and improve the relationship between a franchisor and its franchisees. In particular, it highlights the important benefits and strength of a healthy and open collaboration between all members of a franchise network, as well as the challenges of a unilateral relationship in which the franchisor issues directives and the franchisees decide to follow or challenge them.

This crisis is also another clear evidence of the fact that it is impossible, in a long-term collaboration contract, to govern all the events that may occur throughout the term of the agreement. In fact, we are not aware of any franchise agreements with clauses that are truly relevant to the COVID-19 crisis and its various impacts on both individuals and businesses.

It is in this very exceptional context that Fasken is proud to announce the publication of the results of nearly two years of extensive research into the development of a completely new approach to drafting "relational" rather than "transactional" franchise agreements.

Jean H. Gagnon, Ad.E., Counsel at Fasken, co-authored this white paper with Kate Vitasek, a professor at the University of Tennessee and a renowned author of numerous books and articles on collaborative relationships between businesses, and David Frydlinger, an attorney at Cirio law firm in Sweden and a faculty member at the University of Tennessee where he leads the University of Tennessee's Collaborative Contracting Executive Education course.

This white paper entitled "Relational Contracts: The New Generation of Franchise Agreements" (pdf) is now available (free) online. If you prefer, we would also be pleased to send you a copy in PDF format upon request to jhgagnon@fasken.com.

Franchising is constantly evolving and the many changes affecting many industries in which franchise networks operate constantly raise new questions about the rights and obligations of franchisors and franchisees.

One of the major challenges facing any lawyer drafting a franchise agreement today is how to write a long-term contract knowing from the outset that changes unknown at the time of drafting will inevitably occur during the term of the agreement and that some of these changes will render certain clauses of the contract void or inoperative, while others will require new provisions not originally stipulated in the contract.

To this day, this challenge has, at least in part, been resolved by increasingly shorter term agreements with provisions requiring the franchisee to sign a new, updated agreement each time the franchise agreement is renewed or the franchisee's business is sold, and by requiring the franchisee to comply with the franchisor's operation manual (which the franchisor may amend from time to time).

However, with the increasingly numerous, significant and rapid changes to which almost all franchise networks must respond adequately to maintain the pace of evolution (sometimes even revolution) of their business sectors, these means are no longer sufficient. In any event, accounting, tax, financing and lease conditions impose serious limitations on the ability of a franchisor to reduce the term of its franchise agreements and our rules of law impose very serious limitations on the ability of a party to an agreement (e.g., the franchisor) to unilaterally modify the obligations contained therein or to add new ones.

In this context, the exercise of trying to provide, in a long-term contract, for all the contingencies that could have an impact on the rights or obligations of the parties during the term of their contractual relationship becomes extremely complex; in fact, for many long-term collaborative arrangements, this is an objective that is now impossible to achieve.

On another level, many management experts argue that, in the context of a long-term, ongoing collaborative arrangements, the content of the contract and the process that supports the drafting and execution of most contracts reduce the chances, as well as the level, of success of the relationship between the parties.

In particular, they cite value leakage from contractual relationships based on such contracts (which results, among other things, from the fact that such detailed agreements provide an incentive for the parties not to invest more in the relationship than is necessary to meet their written contractual obligations) and several reports cite good deals that have gone sure or taken the parties to court.

This raises several important questions about the effectiveness of written contracts and their drafting and execution processes.

However, and this is the contractual paradox, to succeed in business (and even more so in franchising), we need strong contracts, even though we are today aware of their limitations and weaknesses.

Lawyers must therefore now review the way they conceive and draft contracts in order to provide their clients with the necessary flexibility to allow them to evolve at the same pace as the commercial reality that franchise networks must follow, while taking into account current best practices in the management of the franchisor-franchisees relationship.

It is in order to face this new reality that Professor Kate Vitasek, Professor David Frydlinger and our Counsel Jean H. Gagnon have combined their experience, expertise and efforts to develop a whole new way of designing and drafting collaborative franchise agreements in order to maximize the short, medium and long term benefits for all parties involved.

Relational Contracts: The New Generation of Franchise Agreements (pdf) therefore proposes a whole new way of approaching the design and drafting of a franchise agreement that promotes a more harmonious and proactive collaboration between a franchisor and its franchisees in the achievement of the network's objectives and in the respect of clear values and guiding principles accepted by all from the outset.

In particular, this new approach facilitates the performance of each party's obligations and provides the flexibility needed to allow the agreement to adapt to the changes that will inevitably occur during its term while maintaining the focus on the mission, vision, values and strategic objectives of the franchise network.

The mission of the authors of this white paper is to propose to franchisors and franchisees a contract that plays a truly useful role in ensuring a better collaboration between them by establishing rules that are both clear and flexible and that maximize the synergy between the contributions of each member of the franchise network.

It is therefore not just a paper to be taken out only in difficult times, but a real practical guide to managing the relationship between a franchisor and its franchisees as a whole (the franchise network) where a more active and positive contribution from each benefits everyone.

To paraphrase one of the most famous quotes from Antoine de Saint-Exupéry, author of the magnificent book The Little Prince, this paper offers us the following: "Success in franchising does not consist of gazing at each other, but in looking outward together in the same direction."

We invite you to read of it and to share it with your entourage and your network.

We also welcome your questions and comments on the results of this research and on this white paper. We invite you to send them directly to our Counsel who participated in this work (Jean H. Gagnon, Ad.E.) at jhgagnon@fasken.com, who will be pleased to read you and to answer any questions or comments.

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