Ten Worst Provisions in a Franchise Contract
Posted Thu, 2016-06-30 10:42 by Jeffrey M. Goldstein
If you are in the process of performing your due diligence on a franchise opportunity, you are probably struggling to comprehend the seemingly-unending legalese in the franchise agreement. Indeed, even the best franchise lawyer struggles to interpret what the drafters intended when they wrote some of the language in many of these agreement templates that, frankly, should have been overhauled long, long ago.
That said, most franchise agreement provisions can be interpreted, and the news often is not good for prospective franchisees. Based on more than 30 years of franchise law experience, here are 10 of the absolute worst provisions in franchise agreements:
1. Mandatory Mediation and Arbitration.
We’ll start with a big one: Many franchise agreements contain provisions that require franchisees to submit all disputes to mediation or arbitration (or both) before they can enforce their rights in court. While mediation and arbitration have their virtues, these provisions are often designed to make it harder (and more expensive) for franchisees to pursue valid claims against their franchisor.
2. Choice of Venue.
In addition, franchise agreements will usually contain provisions stating that all disputes are subject to jurisdiction and venue in the state (and sometimes the city or county) where the franchisor’s headquarters are located. This, again, makes it more difficult and expensive for the franchisee – and provides home field advantage for the franchisor.
3. Non-Competition Covenants.
Non-competition covenants in franchise agreements will often prohibit franchisees from operating independently once their franchise agreement expires. While there are some legitimate arguments in favor of these provisions, franchisors often overreach and impose unreasonable restrictions on their former franchisees.
4. Confidentiality Requirements.
Franchise agreements will often contain confidentiality clauses that prohibit franchisees from talking to the public (and potentially even one another) about issues with the franchise system.
5. Lack of Franchisor Accountability.
While franchise agreements and Operations Manuals (which are typically binding under the franchise agreement) impose an inordinate number of obligations for franchisees, they establish almost no obligations for the franchisor. From use of marketing fund contributions to ongoing training, most franchisors promise next to nothing in their franchise agreements.
6. Modification of the Operations Manual.
Not only is the Operations Manual binding, but most franchisors reserve the right to modify it over time. This clause essentially allows the franchisor to make the franchise agreement even more strict whenever it pleases.
7. Unilateral Default and Termination.
Another one-sided provision: Most default and termination clauses only establish defaults that can be claimed by the franchisor. In many cases, franchisees will be bound for the entire term of the franchise agreement with no express right to get out if the franchisor fails to meet its obligations.
8. Mandatory Supplier Provisions.
Some franchisors establish relationships with suppliers who pay volume rebates, and then they mandate that their franchisees use these “preferred” suppliers. This establishes an additional revenue stream for the franchisor while limiting the franchisee’s ability to seek out competitive pricing.
9. Then-Current Renewal Terms.
When your franchise comes up for renewal, you may be required to negotiate the franchisor’s then-current franchise agreement instead of continuing to operate under your existing contract. This adds more expense to the renewal process, and when franchisors update their agreements it is usually not with their franchisees’ best interests in mind.
10. Conditions on Renewal and Assignment.
Franchise agreements will often impose other conditions on the franchisee’s “right” to renew as well. In addition, these and other conditions usually also apply to assignments – effectively allowing the franchisor to veto any unwanted franchise sales.