We have already written a few times on the importance for any franchisor to have clear and complete contracts that are well adapted to its business model, its network and its operations.
However, a good contract is not always sufficient.
It must also be properly signed and the franchisor must take care to follow and manage the contractual files of its franchisees.
Many costly legal disputes for franchisors have been the result of improper monitoring of franchise agreements or of the contractual files of their franchisees.
These are often simple errors that can be prevented by sound management of these files, but which can become very costly in the event of improper monitoring.
Here are six that we have encountered on more than one occasion:
- Letting a franchisee open her or his franchised
business before the agreements have been properly completed and,
more importantly, signed.
Experience has shown that it can be very difficult to get contracts signed once the franchised business is in operation.
Also, allowing such an opening without signed agreements may raise several important risks for the franchisor, not only with respect to the possibility of ensuring compliance in the event of default, but also with respect to the preservation of the franchisor's trade-marks which may then be jeopardized by reason of their use by a licensee who has not signed the relevant agreements.
- Contracts not signed, or improperly signed, by all
the persons who are parties to them.
Although it is sometimes possible, it can be extremely difficult to enforce a contract against a person who has not signed it.
In this category of errors, there is the case of a contract signed by a person "on behalf of a corporation to be incorporated".
This is a practice that has repeatedly caused serious problems and should be avoided except with the advice and guidance of an experienced lawyer, especially since it is usually possible to incorporate or obtain a corporation in a matter of hours.
- Personal guarantees, non-competition covenants and
security interests not properly completed, executed or
There are rules that must be followed with respect to personal guarantees, non-competition covenants and security interests required of franchisees and of their officers and shareholders.
First, of course, you must ensure that these are properly and completely signed by all the persons involved.
For example, in the case of a personal guarantee and of a non-competition covenant, each signatory must sign them in his own name and not in the name of the franchisee.
In the case of security interests, it is also often necessary that they be registered in accordance with the law in order to be enforceable against third parties, including other creditors of the franchisee.
- Improperly documented assignment by a
The most common error in this regard concerns the case of a sale or assignment of the franchisee's shares.
In such a case, an assignment that is not properly documented may raise several important problems, particularly with respect to personal guarantees and the non-competition covenants.
We have even seen situations where, when initiating proceedings resulting from a default under a franchise agreement, we have found that the directors, officers and shareholders of the franchisee were all different persons than those listed in the franchise agreement.
- Concordance between the text of the franchise
agreement and the schedules to which it refers.
We have also seen problems in this area in the past. For example, it has sometimes happened that franchise agreements describe a "protected territory" in a certain way in the core of the agreement and refer to a schedule that refers to a "protected territory" of a different size. Since many franchise agreements are considered, depending on the circumstances, to be contracts of adhesion, in case of doubt, the court will adopt the interpretation that favours the franchisee.
Once again, the best way to prevent such situations is to (1) retain the services of an attorney specialized in drafting franchise agreements and (2) periodically review the franchise agreements as well as the appendices referring to them, in order to ensure that they still reflect the reality of the network and are still current.
- Continuation of business relationship with a
franchisee after the expiration of the term of the franchise
In the heat of the moment, or by mere oversight, franchisors have on occasion continued to do business with a franchisee after the end of the term of the franchise agreement.
Such a situation raises a number of complex legal issues which may make laywers happy, but which may also result in very significant costs for the franchisor, both if it has to take proceedings following a default and in the even more frequent case where a franchisee later decides to unilaterally terminate its relationship with its franchisor, which, by that time, is no longer governed by a signed contract (since the term of the signed franchise agreement has already expired a few months , or even years, earlier).
These are just a few examples of costly mistakes that can be prevented by sound management of franchisee contract files.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.