I often reviewing franchise offerings for people thinking of buying franchises. And I also write the same kinds of franchise documents for franchisors. This has forced me to face the consequences of certain types of clauses and the ethical implications of those creative clauses designed to protect the franchisor client in all circumstance. So I have been doing some soul searching about franchise agreements and Franchise Disclosure Documents (FDD)– what is fair, what is not and how a franchise relationship should work. As a result of re-evaluating my own drafting and my own advice to franchisors, here is my bottom line:
Say what you mean and mean what you say!
Do not assume that just because an experienced franchise attorney has written your agreement, there is any magic to words that are put together. A contract is a contract. Read it and take the words literally. What does it say? How would it apply in the real world of your business model? Do you really need that clause? What does that clause say about you as a franchisor? If you are a founder, what does it say about you as a person?
Does this contract reflect who you are? What your company represents?
For example, a “one year limitation of claims” clause is becoming more common. These provisions typically say that a franchisee is forever barred from asserting any claim or cause of action against a franchisor unless the franchisee formally asserts the claim against the franchisor in an appropriate legal proceeding/arbitration within one year of when the claim arises. (There are variations, but you get the drift.) From a franchisor’s perspective that sounds great. It overrides the state’s statute of limitations (usually 4 to 6 years for breach of contract claims), and eliminates a lot of problems being asserted late in the game.
But, as a franchisor, do you really want to make your franchisee sue you (or demand arbitration) in less than one year? If it takes 6 to 9 months for a problem to become evident, do you want to force the franchisee to courthouse to avoid losing a claim because you haven’t been able to address the problem immediately? Once a lawsuit is filed, it must be listed in your FDD for the next 10 years.
The last thing a franchisee wants to do is sue its franchisor, it is a drastic and expensive step, but then so is losing one’s investment or running a business in an uncomfortable or hostile environment. Do you really want to play a game of chicken?
So franchisors, step up to the plate and be the leader. Read your contracts. Do you need all those nasty, heartless, soul sucking clauses? As franchising has become so competitive, standing out as the most fair and reasonable is a great way to close a deal.