At the Canadian Franchise Association's recent Franchise Law Day, a workshop was dedicated to the Franchise Agreement of the Future.
This is an important and timely topic in a world characterized by increasingly rapid, far-reaching and frequent changes.
Franchising is constantly evolving, and the many and varied changes affecting many of the sectors in which franchise networks operate regularly raise new questions about the franchisors' and franchisees' rights and obligations.
One of the most important challenges facing any lawyer called upon to draft a franchise agreement today is how to write a long-term contract, knowing from the outset that changes unknown at the time of drafting will inevitably occur during the term of the contract. Some of these changes will render certain clauses of the contract null and void or inoperative, while others will require new clauses not originally stipulated.
Until now, this challenge has been solved, at least in part, by contracts of increasingly shorter duration, with clauses requiring the franchisee to sign a new, updated contract each time the franchise agreement is renewed or the franchisee's business sold, and by requiring the franchisee to comply with the franchisor's operations manual (which the franchisor may modify from time to time).
However, with the ever-increasing number of significant and rapid changes to which almost all franchise networks must respond adequately in order to maintain the pace of evolution (sometimes even revolution) in their business sectors, these means are no longer sufficient. In any case, for accounting, tax, financing and lease duration reasons, there are serious limits to the possibility of a franchisor reducing the duration of his franchise agreements, and our legal rules impose very serious limits to the possibility of a party to a contract (i.e., the franchisor) unilaterally modifying the obligations stipulated therein, or adding new ones.
In this context, the exercise of trying to cover, in a long-term contract, all eventualities likely to have an impact on the rights or obligations of the parties over the duration of the contractual relationship becomes extremely complex; in fact, for many long-term collaborative agreements, this is a goal that is today quite impossible to achieve.
On another level, a number of management experts argue that, in the context of an ongoing, long-term collaborative arrangement, the contract content and the process that underpins the drafting and execution of most contracts reduce the chances, as well as the level, of success of the relationship between the parties.
These include the "value leakage" of contractual relationships based on such contracts (one of the reasons for this is that such detailed contracts encourage the parties not to invest more in the relationship than is necessary to meet their written contractual obligations).
This raises several important questions about the effectiveness of long-term detailed contracts.
On the other hand, and this is the contractual paradox, to succeed in business (and even more so in franchising), we need to design sound written contracts, even though we are now well aware of their limitations and weaknesses.
Lawyers now need to rethink the way they design and draft contracts, in order to offer their clients the flexibility they need to keep pace with the commercial reality that franchise networks must follow, while taking into account current best practices in managing a franchisor-franchisee relationship.
To address this new reality, Professor Kate Vitasek and Professor David Frydlinger, of the University of Tennessee, and our in-house counsel Jean H. Gagnon, have pooled their experience, expertise and efforts to develop an entirely new way of designing and drafting franchise agreements, based on a true franchisor-franchisee strategic partnership, to maximize the short-, medium- and long-term benefits for all parties involved.
This could well be the real franchise agreement of the future!
This new approach facilitates the execution of each party's obligations, and offers the flexibility needed to allow the contract to adapt to changes that will inevitably occur during its term, while maintaining a focus on the franchise network's mission, vision, values and objectives.
This new contract plays a really useful role in ensuring better collaboration between them, by establishing rules that are both clear and flexible to maximize the synergy between the contribution of each member of the franchise network.
Also, it is not just a document to be handed in and taken out only at difficult times, but an actual practical guide to managing the relationship between a franchisor and his franchisees in a whole (the franchise network) where a more active and positive contribution from each benefits everyone.
Unlike the current model franchise agreement used by the vast majority of franchise networks, which focuses on the object of the contract, the rights and obligations of the parties (especially the rights of the franchisor and the obligations of the franchisee), and the recourses for non-compliance with the contract, this new model franchise agreement focuses instead on (i) the shared vision and mission of the franchise network, (ii) the objectives (notably the benefits sought) of the contractual relationship, (iii) the values underlying the franchisor-franchisee contractual relationship, and (iv) the main principles that should guide it (the "Guiding Principles").
Clearly stating in the written contract itself which of these guiding principles, as well as any other values or principles, the parties have chosen to govern their contractual relationship will serve as a guide for any negotiations that may be required during the course of the contract (notably as a result of one or more changes or unforeseen events) and as a basis for any interpretation of the contract that may subsequently be required, notably with regard to ambiguous clauses or, more often still, to silence in the contract on an issue that arises for the parties.
Another aim of clearly stating the guiding principles of the contractual relationship is to ensure that the contract remains mutually beneficial throughout its duration. When faced with changes, the parties should seek solutions that respect the values and guiding principles of their contractual relationship. For example, any solution that does not prioritize the interests of the network as a whole, or that is not fair to either party, will run counter to these guiding principles.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
