A few weeks ago, my colleague Chuck Modell discussed the necessity of developing a “fair but firm” franchise agreement that is designed to work with your particular franchise system. His suggestion that new franchisors avoid using “form franchise agreements” (I would also recommend avoiding consultants who do not meet with you to discuss your system) and instead tailor their agreements specific to their system struck a chord with me. As a franchise litigator who has spent a good part of her career enforcing and defending various provisions in franchise agreements, I can say firsthand that franchisors who invest and actively participate in drafting their franchise agreements, and therefore ensure their franchise agreements accurately describe the expectations of franchises, and understand the practical effect of each of the contractual provisions in their agreements, will save tens, if not hundreds of thousands, of dollars when a significant dispute arises.
Address Your Unique Operations in Your Franchise Agreement
For example, most franchisors have specific ideas as to how their franchisees will operate. These will differ in each system. In some, franchisees are expected to order from common suppliers, or pool their orders with other franchisees. In others, the franchisor may have ideas as to how customers will be solicited, and even shared among franchisees – such as in the case of national accounts or memberships with reciprocity rights. You may have specific ideas about advertising in a market, billing customers or serving customers outside a service franchisee’s territory. If a franchisor relies on a boilerplate franchise agreement and does not have an experienced person help them to identify and address these issues, the agreement will not likely reflect the practices of the franchisor and will not address issues in the way the franchisor would want them addressed. You may find yourself unable to implement aspects of your system. Worse, you may find yourself to be liable for doing or enforcing something you thought was permitted or required by your agreement.
Draft Customized Dispute Resolution Clauses
Dispute resolution clauses should also be drafted with the needs of your system in mind. Do you want the franchisee to be able to file a lawsuit in its home jurisdiction or do you want all lawsuits venued in your home jurisdiction? Would you prefer to require the parties to mediate all disputes before a lawsuit is filed or simply proceed with arbitration or litigation? If you choose to mediate or arbitrate, where will the proceedings take place? How about requiring the mediator or arbitrator to have experience specific to your franchise system rather than someone with no familiarity with your industry? These are all issues that experienced franchise counsel will discuss with you when drafting your franchise agreement to ensure your system is best protected.
These are just a few of many examples where your initial investment in a custom franchise agreement will pay off in the long run. You’ve worked hard to develop your business model and brand and a solid franchise agreement will ensure both are protected by providing franchisees with clear expectations of what happens when the relationship is successful and in the unfortunate event it is not.