Franchisees must understand their contractual obligations to build and maintain a successful business. Franchisor responsibilities are to be clear in their franchise documents about the franchisees’ obligations; further, the franchisor must be consistent in its policies and procedures, which need to adhere to the franchise agreement. Otherwise, expensive, time consuming disputes will occur.
In this article, we aim to provide a comprehensive understanding of these obligations and explore their significance for both franchisors and franchisees (“the Franchise Group”). Let’s delve into this important topic.
What is franchisee control and why is it important?
Franchisee control refers to the prescribed level of authority and decision-making power that a franchisee has in managing their franchised business.
This franchisee obligation is important, as it is the franchisee responsibilities to control the quality, customer service, and operational decisions, and must ensure that the brand maintains a positive image in their specific market.
Franchisee control and its role in franchising agreements
The role of franchisee control in franchising agreements is significant and can vary depending on the specific terms and conditions agreed upon by both parties.
Franchisees typically have control over:
- Day-to-day operations;
- Management of their franchised business;
- Hiring and training employees;
- Implementing local franchise marketing strategies; and
- Maintaining the quality standards set by the franchiser.
Franchisee control also extends to financial matters, such as:
- Often setting prices for products or services;
- Managing inventory; and
- Controlling costs.
However, the franchisor often retains control over:
- Approving major expenses;
- Monitoring performance metrics;
- Appearance of business;
- Approving vendors; and
- Enforcing quality standards.
Benefits and challenges associated with franchisee control
Benefits of franchisee control:
- Autonomy;
- Profit potential;
- Local market understanding; and
- Entrepreneurial spirit (within limits of the franchisor’s requirements).
Challenges of franchisee control:
- Adherence to brand standards;
- Limited decision-making power;
- Adherence to the franchisor’s requirements (the Manual); and
- Economic climate, clientele interest, and market conditions.
Legal considerations and obligations for franchisors regarding franchisee control
Franchisors have certain legal considerations and obligations largely governed by franchise laws and regulations, as well as the terms of the franchise agreement.
Franchise agreement
The franchise agreement is a legally binding contract between the franchisor and franchisee that outlines the rights and obligations of both parties.
It typically includes provisions related to franchisee obligations, such as training, operations guidelines, quality standards, and brand usage.
Compliance with franchise laws
Franchisors must comply with various laws that address disclosure requirements, state/commonwealth registration or filing obligations, and prohibitions on unfair or deceptive practices.
Franchisors must provide accurate and complete information to franchisees and avoid engaging in any unfair business practices.
Operations and quality control
Franchisors exercise control over the operations and quality standards of franchisees to protect the brand’s reputation and maintain consistency.
However, they need to strike a balance between maintaining control and avoiding excessive interference. They must not risk creating an employer-employee relationship or potential vicarious liability for the actions of franchisees.
Training and support
Franchisors have an obligation to provide adequate training and ongoing support to franchisees. This includes training franchisees to understand the franchisor’s business model, brand standards, and operational requirements to minimize the risk of legal disputes.
Monitoring and inspections
Franchisors may have the right to monitor franchisee operations and conduct in a reasonable manner, which may include inspections and “secret buyer” monitoring. Any inspections or monitoring rights should be clearly stated in the franchise agreement. Examples of franchises where this monitoring occurs: retail-related and food industries.
Franchise terminations
Franchisors may have the right to terminate a franchise agreement if a franchisee fails to comply with the terms and conditions. However, such termination rights should be exercised pursuant to the contract terms and consistent with applicable state laws.
Franchisors must follow proper procedures and provide reasonable notice of contract breaches and, as usually permitted in the agreement, the opportunity to cure any breaches.
Potential legal risks and obligations for both parties
Potential legal risks and obligations for both parties in a contract or agreement may vary depending on the nature of the contract and the specific terms and conditions involved.
Nonetheless, the following are some common legal risks and obligations that both parties need to be aware of:
Breach of contract
Both parties are obligated to perform their respective duties and obligations as laid out in the contract (Franchise Agreement). Failing to fulfill these obligations can lead to a breach of contract claim, in which the non-breaching party may seek damages and possibly other remedies provided by the contract, statutory or common law.
Non-payment/non-delivery
If one party fails to make payment or deliver goods/services as agreed upon, the other party may have grounds for legal action seeking payment, damages, and possibly other remedies provided by the contract, statutory or common law.
Misrepresentation or fraud
Both parties have an obligation to provide accurate information and not to engage in fraudulent activities when negotiating or executing a contract. Misrepresentation or fraud can lead to the contract being voided or result in a claim for damages.
Intellectual property infringement
If the franchisee uses the intellectual property (e.g., trademarks, copyrights) of the franchisor in a manner not permitted under the contract’s limited license, it can result in a default of the agreement, including damages and injunctive relief.
Non-disclosure/confidentiality breaches
If either party breaches non-disclosure or confidentiality obligations outlined in the contract, the affected party may have grounds to enforce those obligations through legal action, seeking damages and/or injunctive relief.
Health and safety regulations
Depending upon the industry, both parties may have obligations to comply with applicable health and safety laws and regulations. Failure to meet these obligations can result in legal liability, fines, or other penalties, including the shut-down of the franchise business.
Indemnification and liability
Contracts often include clauses that allocate risk between the parties, such as indemnification clauses. Parties should carefully review and understand these clauses to ascertain their potential obligations to indemnify, defend, or hold harmless the other party in the event of certain events.
Strategies for maintaining compliance and minimizing dispute risks
- Clear and comprehensive documentation to ensure that all parties involved have a clear understanding of their rights and obligations.
- Regular training and communication for employees and franchisee-owners about compliance requirements to minimize the risk of non-compliance and reduce the potential for disputes.
- Proactive monitoring and auditing by implementing regular checks and reviews to identify any potential compliance issues or gaps so that corrective actions can be taken before they escalate into disputes.
- Communicate with the franchisor!
Consult with legal professionals
The legal landscape surrounding franchisee control can vary by jurisdiction and is subject to ongoing debate, legislation, and court interpretations.
Both franchisors and franchisees (the franchise owner) will benefit from legal guidance to protect themselves in this ever-changing world. Consider that a mis-step by either party could lead to a dispute that will cost far more than a few hours of preventative ”legal medicine”. Consulting with legal professionals, like Kilcommons Law, can ensure compliance with relevant laws and regulations with properly drafted franchise agreements and franchise disclosure documents.
Reach out to Kilcommons Law today. We are here for all of your franchise needs.
© Kilcommons Law, P.C. 2023