Franchise agreements: get legal advice

Jenny Batchelor, partner at Batchelor Myddelton Solicitors, explains the importance of having your draft franchise agreement reviewed by a specialist franchise lawyer

It is surprising how many franchisees come to Batchelor Myddelton once they have become embroiled in a dispute with their franchisor having never taken any legal advice on the franchise agreement they signed. Some have signed on the dotted line without even reading it.

While taking legal advice at the outset does not necessarily mean there will be no issues arising down the line, at least if franchisees have taken advice they are going into the franchise with their eyes open.

So who should they choose to provide this advice? They can use the solicitor who deals with their house moves or pick someone else who is local. However, franchising is a complex area and, as a result, there are many advantages in selecting a solicitor who specialises in franchising. Most will carry out a fixed price review service.

The basic rights and obligations of the franchisee under the agreement
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Any solicitor will be able to review the agreement and explain what it means. However, a specialist solicitor will have the benefit of knowing the areas where problems are likely to arise in practice.

In particular, we find that often if an individual sets up a company to become the franchisee they mistakenly think that if things go wrong the company can be wound up and that will be the end of the matter. However, in the majority of cases in circumstances such as this the individual will be a party to the agreement too and will effectively be guaranteeing the obligations of the franchisee company. In assessing the risks attached when selecting a particular franchise, it is key this is understood by the franchisee.

The importance of the manual
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Franchise agreements generally refer to a manual, which is a document that sets out how the franchise is to be run in practice. Often franchisors will say that a prospective franchisee cannot see the manual until they have signed the franchise agreement, as the manual includes their trade secrets.

However, a specialist solicitor will be familiar with this argument on the part of franchisors and will be able to suggest ways round the problem. For instance, a prospective franchisee may be permitted to read the manual under controlled conditions, but will not be allowed to take a copy away with them.

Clauses that are unusual or non-standard
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Only solicitors who review franchise agreements regularly will be aware of the clauses that are normal, both generally and in relation to particular industries. As a result, they are able to highlight unusual or non-standard clauses so that the prospective franchisee can go back to the franchisor and ask questions.

Law that applies even if it is not specifically referred to in the agreement
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In relation to termination, we find in practice that franchise agreements often set out many grounds upon which the franchisor can terminate an agreement early, but remain silent in relation to a franchisee’s right of termination. This does not mean that franchisees do not have the right to terminate early. A specialist solicitor will be familiar with case law that says a franchisee may elect to accept the repudiatory breach on the part of the franchisor and bring the agreement to an end.

It on the other hand, the franchisee is in breach and the franchisor terminates the franchise agreement as a result, the franchisor has the right to sue for damages for the remainder of the term. This is a common law right that is often not set out specifically, as it does not need to be. Again a specialist solicitor will be familiar with this and the legal arguments that are frequently raised by franchisors in the context of a dispute.

Restrictive covenants is another area where the common law is relevant in practice. The restraint of trade doctrine provides that any restrictions imposed on the franchisee must be reasonable in scope in order to protect the goodwill of the franchisor. However, it is surprising how many franchisees are misinformed in relation to covenants. We often hear franchisees say that: “The franchisor cannot stop me earning a living” or “these restrictions are not worth the paper they are written on”. A specialist solicitor will be able to advise on the likely enforceability of the covenants in the light of recent case law in the franchising field.

Scope for negotiation
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Franchisors will sometimes say that a franchise agreement cannot be amended -effectively, take it or leave it. Although it is true that it is rare for the actual body of the franchise agreement to be amended by the franchisor for the benefit of a franchisee, it is relatively common for franchisees to be able to agree amendments to certain parts of the agreement by way of side letter.

For example, if a franchisee is investing in a fairly new franchise, or one that is intended to be run on a part-time basis while the franchisee is doing something else to supplement their income while the franchise gets off the ground, a franchisee may need to agree with the franchisor that the standard provision in the agreement about devoting full time and attention to the franchise business will not apply.