Although franchisees are regarded as being in business for themselves, they are part of a broader network and have bought into and must abide by someone else’s business model. This is a franchising agreement
According to Tanya Woker, Professor of Law and author of ‘The Franchise Relationship under South African Law”, there is a need to ensure the right balance between the rights of franchisors to protect their networks and the rights of franchisees to benefit from the investment they have made.
More than just a legal contract
On the face of it, the legal relationship between a franchisor and franchisee seems to be relatively straightforward. The courts have always treated the franchising agreement as a normal commercial contract interpreted according to the general principles of the law contract. In practice however, franchising is so much more than just a contract; it is also a system of governance which involves an intricate set of legal rights with special requirements, demands, challenges, costs and complexities. Although franchisees are regarded as being in business for themselves, they are part of a broader network and have bought into and must abide by someone else’s business model. When individual disputes arise, there may be much broader issues at stake than simply the interests and concerns of a single franchisee.
Brand protection is key
Successful franchising depends on uniformity of good quality performance. Customers want to know that no matter where they are in the world, if they see a recognised trade mark they know they will be getting the same quality and service with which they are familiar. One of the most important responsibilities of franchisors is to protect and maintain the image of their brands. For this reason they will place relatively onerous burdens on their franchisees to ensure there are sufficient checks and balances in the contracts to control errant franchisees. Franchisors will control matters such as work hours, appearance of the outlet, quality of goods and location. They will also retain the right to monitor franchisee performance through regular checks, audits and reports.
Balancing ownership and control
A critical feature of the relationship is the fact that whilst franchisees own the assets of their businesses the franchisor has the power to determine how the assets are used. This distinction between ownership and control leads to an in-built power imbalance in the franchisor-franchisee relationship. This power imbalance is inevitable and must be understood by franchisees. Unfortunately it can be abused if franchisors engage in opportunistic behaviour. However, it is not also easy to distinguish between franchisor opportunism or necessary steps to protect and enhance brands. It is also very difficult for individual franchisees to challenge franchisor power, because if they do show dissent, franchisors may exercise their right to terminate or they may refuse to renew agreements.
Aiming for a win-win relationship
If everything that affects the franchise relationship has been properly thought through and documented, the parties to the arrangement will know from the outset where they stand. As a result, there will be fewer surprises and a reduced likelihood of disagreements arising at a later stage.
To ensure the win-win outcomes that are the hallmark of a successful franchise network, franchise agreements need to balance the rights of the parties with their respective obligations, keeping in mind that the franchisor needs the power to enforce compliance with certain guidelines that go to the heart of network performance. Although the franchising agreement should strive to grant equal rights and obligations to the parties, practicalities dictate that the franchisor’s rights must be stronger in certain respects to ensure adequate control over the brand.
The regulations to the Consumer Protection Act contain comprehensive provisions as to what a franchising agreement should include. Many other provisions of the CPA will also have an influence on franchise agreements, for instance: the sections stating that agreements (which include franchise agreements) must be in plain and understandable language.
Source: Franchise Association of South Africa – www.fasa.co.za
