6 Ways to reduce the risk of a dispute arising in a franchise agreement

Disputes are, unfortunately, a fact of life.  The key to minimising the risk of a dispute arising is to put measures in place to try and avoid a dispute from happening in the first place.

When it comes to franchise agreements, there are a number of ways you can look to minimise the risk of a dispute.

First and foremost, this can be achieved by the franchise agreement itself, and the detail it contains.  Secondly, how the franchise agreement is policed.  If the two go hand in hand, this can build a strong foundation for dispute avoidance or, at the very least, dispute minimisation.

One of the possible disputes that may arise is when a franchisee looks to exit the franchise early, perhaps alleging to have been misled into entering the franchise in the first place, thereby arguing that misrepresentation by the franchisor has occurred.  To minimise the risk to the franchisor of such a situation arising, it is recommended that you:

  • Ensure the franchise agreement contains the ‘entire agreement’ – namely, everything is documented in the agreement. It is also advisable for the agreement to contain a clause that expressly excludes conversations and/or promises that may have been made prior to the agreement being entered into.
  • If additional points are agreed between the franchisor and franchisee, they can be documented in a side letter to the franchise agreement. This avoids a situation where the franchise agreement is amended; this is especially of relevance if the franchisor is looking to maintain uniformity in the franchise agreement to all franchisees.
  • Carry out a disclosure exercise before entering the franchise agreement. Whilst it is not a requirement for franchise businesses to have disclosure documents, this is widely recommended, as it allows the franchisor to give the franchisee all information about the franchise, enabling the franchisee to make an informed decision about entering into the franchise.  This will minimise any arguments the franchisee may raise about not being fully informed prior to entering the agreement.
  • The franchise agreement should contain a number of acknowledgments that the franchisee is both informed and aware of various factors making up the franchise and the agreement.
  • Restrictive covenants should be in place which set out what the franchisee can and cannot do during the franchise agreement, as well as after the agreement comes to an end.
  • The agreement should also set out how the franchise will be monitored by the franchisor and how the franchisee is to provide updates and reports on the business performance. This enables the franchisor to ‘police’ the franchisee and take any steps if a franchisee is not acting in accordance with the terms of the agreement.

If you are considering becoming a franchisor, Rooks Riders Solicitors’ specialist Franchising Team are on hand to guide you through your journey, advising you every step of the way.

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