How does a franchise dispute arise?
Under a franchise agreement, the franchisor grants the franchisee the right to carry on a business using the trademark, logo, and advertising of the franchisor. In exchange, the franchisee pays the franchisor a franchise fee and, in some cases, payment for goods or services, or a percentage of sales. Details of each franchise agreement will vary from case to case.
The franchise agreement will usually require the franchisee to comply with an operations manual that sets out how the franchised business is to be run.
Franchise agreements set out the terms and conditions with which the franchisee must comply. They often include conditions about the payment of fees and royalties, adherence to the franchise system, protection of intellectual property, and quality management, amongst others.
Many of those conditions are put in place to protect the value of the franchised brand. If a franchisee does not live up to expectations, or does not protect the intellectual property of the brand, it could have a detrimental effect on the rest of the franchise.
Franchise disputes arise when one of the parties does not do, what they have agreed to do.
For a franchisee, this could be non-payment of money – and usually is. Often, though, it is the franchisee who has the issue – for example, if the franchisor wants to change the franchise system unilaterally and fundamentally – or if the territory demarcation is not adhered to.
If the franchisee doesn’t comply with its obligations under the franchise agreement, disputes will inevitably arise.
Although in most franchise agreements, the franchisor will hold more power than the franchisee, franchisors should be wary of being overly restrictive or oppressive, as that could open them up to potential liability.
If a franchise agreement is not drafted appropriately or is extremely prescriptive about the way in which the franchisor is to carry on its day-to-day business, the franchisor could find itself liable, or jointly liable, for the actions or omissions of the franchisee.
If the franchisor contributed in some way to loss or damage suffered by a third party, the franchisor can also be found liable, or jointly liable, by the Court.
In circumstances where the franchisor is at fault, there may be more than one franchisee who has suffered loss or damage as a result. In those cases, it may be possible to commence a class action against the franchisor.
This would allow the franchisees to pool their resources against the franchisor and minimise their individual legal costs. This strategy can be particularly useful when up against a very large franchisor with significant resources to call upon.
