Franchise agreements should be regarded as live documents, deserving review and appropriate changes as the system matures and as lessons are learned. However, revisiting base obligations and critical fee structures usually only happens when the current form of agreement is introduced to replace the old relationship document on renewal or transfer of an existing agreement. In rare cases, agreed changes might be negotiated as part of an exchange of value between the franchisor and its sub-licensees.
The operations manual is a much more flexible document and will incorporate regular changes associated with the system. It is however concerned with operational matters, not the basic contractual arrangement between the parties and most would see it as a document guiding the delivery of business activities by the franchisee and not as a means of reviewing the fundamentals of the contract or the basis for establishing profit calculations for the parties. The underpinning contract (the franchise agreement) is viewed as definitive of the key rights of the parties during its (usually long) term, commonly with an expectation on the part of the franchisee that even a new and revised version signed on a renewal will not change the underlying relationship.
COMMON MECHANISMS FOR CHANGE
These comments do not ignore mechanisms for variation of the contractual relationship, especially in the area of extra costs to the franchisee, generally built into generic franchise agreements. These may include:
Often there is recognition that the franchisor may introduce new products to the system which may be capable of commercialisation. The acquisition of the new product may involve additional cost and conditions to be negotiated between the parties.
The grant of exclusive or non-exclusive territories may contain a mechanism for internal reviews prompted by a number of factors, such as failure to meet performance criteria and develop a territory, population changes, a first right of refusal to expand or acquire adjacent territories etc.
Product ranges are under constant review. Changes to product may be improvements or additions falling short of the concept of new product. These product offerings are part of normal and appropriate responses of a system to changing market circumstances.
Remodelling and other future cost obligations often associated with fixed premises franchises.
Advertising / Promotions
Special promotion contributions funded by all franchisees in circumstances such as product launches, identified anniversaries and so forth.
This is expected to be amended on an ongoing basis. The franchisor will have obligations to notify and deliver amendments to franchisees and the franchisees will have an obligation to comply.
The franchisor will have generally expressed powers to direct the franchisee on matters such as display and use of the systems, marks or image, use of products and technology associated with the system, the level of stock, performance standards and other matters.
The franchisor is usually able to provide directions to franchisees on changes to, and compliance with, the image of the system, including with respect to signage, uniforms and brand display.
The franchisor may require the franchisee to participate in further training or obtain suitable qualifications relevant to the system such as maintaining local, State and other licenses.
The above are some of the accepted contractual indicators of change during the term of the franchise agreement. They share a number of features including the directive power of the franchisor, potential additional cost to the franchisee and notions of altered methods of conducting the franchisee's business. They are however fundamentally bound up in the notion of improvements to the system in areas where flexibility on the franchisor's part is critical given unpredictable or uncertain business circumstances moving forward.
WHAT OTHER RIGHTS TO CHANGE MAY BE DESIRABLE
It is assumed that franchisors would commercially be attracted towards having the right to make unilateral changes to the franchise system beyond the broad nature of changes illustrated above. Some examples where this would be seen as desirable include:
- Changes in fee structure
While shying away from suggesting giving the franchisor the right to change fee structures simply to provide it with additional profit, there may be defensible reasons to seek increases in franchise fees, advertising fund contributions, levies, etc. For example there may be the need to engage in capital intensive funding of research and development to enable to the survival and good health of the system. The outcomes should flow through to the benefit of the franchisees but absent their contribution, the financial burden may for a period fall on the franchisor and cut significantly into its reasonable profit margin.
- Charitable objectives
Significant contributions to charitable objectives, whether of a targeted or general nature may be outside stated advertising fund objectives or other available joint funds. Targeted public generosity may be a good reason to look at interim increases in franchisee contributions which will strengthen the goodwill and public standing of the system providing likely flow through benefits to all participants.
While having already disavowed profit grabs there may be a genuine case for reviewing profit apportionment between parties, especially where franchisors find themselves obliged to sacrifice significant proportions of their profit to meet greater than expected costs in meeting obligations and implementing developments as promised to franchisees. An example of this may include IT platform development.
- Sale and merger of competing franchise
Systems are sold and from time to time even merged with former competing systems. Ideally uniformity in trade brand, image and procedures moving forward should be achieved on completion. However, there may be hold out franchisees who insist on branding image and other rights granted under the original agreement and refuse to comply with voluntary changes requested after a sale or merger.
- Changes in support structure
Frequently a start-up franchisor will provide support directly to its franchisees in a bipartite arrangement. However, in circumstances where a system expands rapidly, franchisees may be better supported where the franchisor can divide up the area in which the system operates and allocate supervision of portions of that area to master franchisees or area representative franchisees appointed by the franchisor.
- Changes in technology
Few need to be reminded that technology and related delivery systems (think Facebook, Twitter, etc) move at an extraordinary pace and that future technology developments cannot be anticipated at the commencement of a franchise agreement. Devising an appropriate contractual formula for adequately covering these matters moving forward may not be possible.
RESISTANCE TO NON-CONTRACTED CHANGE REQUESTS
Negotiations that impact on a franchisee's profit expectations or business delivery are very hard to justify to the affected party.
Franchisees will likely argue that changes unsupported by the franchisor's contract rights were not part of the original deal and that in entering into the system, they did so based on the franchise agreement presented to them.
Franchisees and regulators in some jurisdictions may argue that alterations to a system where the outcome is arguably disadvantageous to franchisees should be struck down under fairness in trading legislation or that such changes constitute unconscionable conduct.
The implementation of changes even with the support of the majority of franchisees may still be resisted by a few stubbornly clinging to the terms of their original franchise agreement.
METHODOLOGIES TO PROVIDE FRANCHISORS WITH ENHANCED FLEXIBILITY FOR CHANGE
In the absence of legislation preventing the entering into of imbalanced contracts or permitting reviews of contractual relationships in order to construct a level playing field, the answer to greater franchisor flexibility must lie in contractual drafting. That is, a lateral approach in drafting the template franchise agreement should be considered to provide the commercial flexibility desired by the franchisor. If this is achievable, then the substantial alterations on key underpinning matters can be achieved during the life of the franchise agreement without the need to engage in extensive individual negotiations or hold over until a renewal.
To insert the desired contractual flexibility is not an easy task. Generalised phraseology indicating the franchisor has the right to change will run up against:
- Independent advisors to the franchisee who will argue against them, or indeed, against the franchisee entering into the proposed agreement.
- Unfriendly interpretation by courts who will say that less than specific drafting works against the franchisor in any dispute with the franchisee. Most jurisdictions recognise the 'contra proferentum' rule and will interpret clauses, where there is vagueness, against the party responsible for the drafting.
If a contractual approach to additional flexibility is to be taken up, the issues have to be specifically identified and considered carefully for inclusion in the franchise agreement.
A way of dealing with this recommended level of detail is to include in the franchise agreement a provision that in certain circumstances, the franchisor may impose on the franchisee change requirements other than those set out in the main body of the agreement. That clause should be supported by a schedule providing a sufficient level of detail of possible future changes and protocols, including reasonable notice, for implementation of change.
Suggesting protocols for change implementation also mean that a uniform protocol should be used for each change. The nature and severity of the change should guide the drafter's hand. For example, a schedule might be drafted as follows:
the franchisor must provide the franchisee with notice of the proposed changes and for a period of X days after that allow the franchisee the opportunity to make submissions either directly or through the systems franchise representative committee. After the period for submissions has passed if changes are to proceed, the franchisor must make its determination in good faith given the interests of the system as a whole based in part on those submissions. (This clause might be supplemented by a face to face discussion obligation or even an option of mediation to support the change.)
These will be implemented upon the giving of X days notice and provided no less than 75% of the system franchisees that have received notice have communicated their written acceptance of the same.
Changes will only be implemented after a period of X days have passed to enable the franchisee to make appropriate adjustments in the conduct of their business so as to adopt the changes required. (Some systems may even offer financial assistance to do so.)
Or such changes will be implemented upon the expiration of notice and provided all changes are implemented in all company owned stores.
This article contains a number of preliminary thoughts intended to stimulate debate and consideration of an issue that has from time to time created great frustration amongst franchisors. Any methodology that will enable the systems' health as a whole to be promoted should not be frustrated by one or a few franchisees who remain steadfast in claiming their rights under their original agreement or pursue a strategy of seeking additional financial advantage for themselves by holding out on consents to system changes. Of course, when implementing changes to the Franchise Agreement any disclosure obligations under relevant franchise laws arising from any extension of scope will need to be met.
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