5 simple things franchisors can do to make franchise agreements more balanced

Magnolia Legal has been hard at work reviewing numerous franchise agreements, most of which have heavily favoured the franchisor. While this imbalance is typical in franchising, certain clauses (or their absence) stand out as clearly unfair, often raising eyebrows for potential franchisees (or their vigilant legal advisors!).

Especially with the recent updates to the Unfair Contract Term laws, we firmly believe that franchisors should aim for fairness and balance in their franchise agreements. Here are five simple adjustments franchisors can make to achieve just that:

  1. Ensure Mutual Confidentiality: While most franchise agreements meticulously outline what constitutes the franchisor’s confidential information and the obligations of the franchisee in handling such information, they often fall silent when it comes to the franchisee’s own confidential data. Franchisees typically disclose extensive information about their businesses to the franchisors, including sensitive financial details. Despite this, the vast majority of franchise agreements do not require the franchisor to do anything to maintain the confidentiality of the franchisee’s information. It stands to reason that franchisees should be entitled to reciprocal confidentiality protections from the franchisor.
  2. Maintain Consistent Legal Standards: Franchise agreements frequently employ terms like ‘best endeavours’ and ‘reasonable endeavours’, which have different legal meanings. What rings alarm bells, is consistently including more burdensome standards on the franchisee than the franchisor throughout the franchise agreement. For instance, I recently came across a franchise agreement that required the franchisee to use their ‘best endeavours’ while the franchisor was only obligated to exert ‘reasonable efforts as it sees fit’ to achieve the exact same thing, and within the same clause. Such discrepancies in legal standards signal an unfair balance.
  3. Avoid One-Sided Indemnities: While indemnity clauses are common and sensible in franchise agreements, one-sided indemnities that heavily favour only one party indicate an imbalance in the relationship (and are likely to be unfair contract terms!). Franchisors should consider incorporating carve-outs in their indemnity provisions to ensure franchisees aren’t held liable for losses caused by the franchisor themselves. Additionally, reciprocal indemnities in favour of franchisees for the franchisor’s own breaches of the agreement should be considered.
  4. Specify Both Parties’ Obligations Clearly: Many franchise agreements meticulously detail the exact obligations of the franchisee, but contain only vague statements regarding the franchisor’s responsibilities, such as to ‘provide such support as the franchisor deems necessary in its absolute discretion’. Such ambiguous clauses offer little assurance to prospective franchisees regarding the actual support they can expect. They are also very difficult to enforce (which is probably a reason they were drafted in such a vague fashion in the first place!). Franchisors should consider including specific clauses reflecting what they will do to support the franchisee and the network.
  5. Include Reference to Good Faith: Despite all parties to a franchise agreement being subject to the statutory obligation of good faith as per the Franchising Code, this obligation is seldom reflected in the agreement itself. Incorporating an express term compelling both parties to act in good faith ensures the agreement is interpreted in line with this statutory requirement, offering reassurance to prospective franchisees.

By making these minor adjustments to the franchise agreement, a better balance is struck. This not only makes the franchise opportunity more enticing to potential franchisees but also reduces the likelihood of breaching Unfair Contract Term laws. Ultimately, at Magnolia Legal, we believe that the most successful franchisors are those who view the franchise relationship as a true partnership, rather than a master-servant dynamic. Crafting a contract that reflects this philosophy just makes good business sense.

Disclaimer: This article contains general information only and does not constitute legal advice. Magnolia Legal disclaims any liability arising from reliance on this article. Our terms of use apply