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Bulletin

Nine practical tips to prevent disputes within a franchise network

Fasken
Reading Time 6 minute read
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Overview

Franchising Bulletin

Our last three franchise bulletins have focused on various tools and mechanisms for resolving disputes within a franchise network.

But, as the saying goes, "Prevention is better than cure."

Based on our experience in resolving disputes between franchisors and franchisees, here are nine practical tips that will help you better prevent such disputes within your network.

Be clear

Many disputes are the result of ambiguities or misunderstandings between a franchisor and one or more of its franchisees.

It is therefore very important that all communications be as clear as possible.

This advice applies both in the pre-contractual phase (where the franchisee must have a clear understanding of what to expect from the franchisor, as well as their respective roles and responsibilities in the contractual and business relationship) and in the franchise agreement itself, as well as in all communications from the franchisor throughout the contractual relationship.

Have current, clear and complete documentation

In several cases, we have encountered agreements that were not properly or completely executed, agreements that had expired, or agreements that were not properly renewed.

Such situations increase both the risk of a dispute and the difficulties to be overcome throughout such a dispute. For the franchisor, they also greatly increase the risk and cost.

It is therefore important to ensure that your contracts are signed in a timely manner and that they are kept up to date.

Among other things, it is always very risky to allow a new franchisee to launch her or his business before having signed the agreement. This can happen when contract negotiations drag on or when deadlines in other agreements (e.g., leases) dictate a quick opening of the franchise outlet.

Whatever the reason, experience clearly shows that a franchisee is much less likely to sign its agreement once its franchised business is open as both the franchisor and the franchisee then have many other concerns than following up on the signing of their agreement.

Document your communications

Documenting (e.g., through written exchanges, confirmation emails, minutes of meetings, exchanges and video conferences, and notes) communications with your franchisees is also an excellent tool for preventing disputes.

Also, in the event that a dispute arises, complete records of notes, emails and written documentation of communications and exchanges will greatly facilitate your lawyer's work and will constitute an important advantage throughout the dispute resolution, arbitration or litigation process.

Constantly monitor your franchisees

The sooner a problem is identified, the easier it will be to resolve!

The various reports that your franchisees must send you under your franchise agreement should not only be used to calculate your royalties.

These reports are tools that allow you to identify many problems and discrepancies before they become major problems.

It is therefore important to insist that these reports be submitted to you diligently, and also to review them promptly in order to detect any actual or potential discrepancies or problems as soon as possible.

Similarly, it is also important to regularly visit the franchised businesses in your network in order to, once again, identify any deviations from your standards and any difficulties as soon as possible.

Act quickly and appropriately to address the situation

Once a discrepancy or problem is identified, it is important to act quickly to resolve it.

Acting early also allows the problem to be addressed in a much less drastic way and minimizes the impact on the concerned franchisee, other franchisees and the network as a whole.

It is also important to act in a manner appropriate to the situation.

Before considering default notices and legal remedies, it may be appropriate to use other tools, including clear communication, support, a recovery plan, additional training, coaching and mentoring, among many others.

Whatever approaches are chosen, as mentioned earlier, it is always important that they are well documented, including, in many cases, agreements specific to the situation and its correction.

Comply with your agreements

One of the obstacles we encounter from time to time when a dispute with a franchisee arises is that the franchisor itself has not fully complied with the terms of its franchise agreement.

These omissions by the franchisor most often relate to technical aspects of the agreement, such as the requirements regarding notices to be given, the observance of certain deadlines and time limits, the manner of giving notices, and to whom notices should be given.

Since the franchise agreement was drafted by, or on behalf of, the franchisor, any failure on the part of the franchisor to comply with the terms of the agreement, including its technical terms, will generally be construed against the franchisor.

Avoid underestimating the situation and the other parties to the dispute

Sometimes a franchisor believes that a troubled franchisee will not have the financial resources to engage in arbitration or court proceedings.

With a contract in which most of the clauses often benefit the franchisor, it is also easy to underestimate the scope of the complaints raised by a franchisee.

It is always a mistake to underestimate a situation, the arguments of another party or the determination or resources of another party to a dispute.

For example, a franchisee may have access to resources that the franchisor does not know, or may bring in others, including other franchisees, to support the franchisee. She or he may even become a promoter of the formation of a franchisee association.

Consider the impact of the situation and your actions on other franchisees, the network and third parties

This is an important piece of advice and ignoring it can cause many unforeseen problems.

The relationship between a franchisor and a franchisee is not a solitary one; it takes place in the context of a network that also includes other franchisees.

Thus, a problematic situation with one franchisee may have an impact on other franchisees. In such a case, the case law requires the franchisor to act quickly to put an end to any harm caused to other franchisees by a franchisee's shortcomings.

On another level, the decisions and actions of a franchisor with respect to one of its franchisees will also be scrutinized by its other franchisees.

If the other franchisees conclude that the franchisor is abusing its rights or acting unreasonably, the franchisor runs the risk that they may decide to support the franchisee or engage themselves in a dispute with the franchisor.

Finally, in this late 2021, a franchisor must also consider the public impact (whether through social media or traditional news media) of its actions vis-à-vis its franchisees.

Thus, when formulating and drafting its notices, opinions (e.g. termination notices), demand letters and proceedings, a franchisor and its legal advisors should take as granted that these may be made public and consider the consequences that such publicity may have.

Consult your franchise lawyer as soon as possible

Contrary to what you might think, it is much more economical to involve your lawyer as early as possible in a situation that is likely to escalate into a dispute.

Many franchisors have the reflex to wait until the situation has really become a dispute, or even a litigation, before consulting their lawyers, both to save fees and in the hope that the situation will be resolved before it becomes an actual dispute.

By doing so, they run the risk of making decisions, taking actions or saying things that will later be detrimental to them.

They also prevent their lawyers from providing them with timely and appropriate advice and, in some cases, from presenting them with solutions and strategies that they had not considered.

Fasken has all the experience and resources necessary to help you draft agreements that protect your rights and prevent disputes, as well as to advise, guide and assist you in any difficulties or disputes with one or more of your franchisees.

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