Clean slate

Manzoor Ishani discusses the conditions surrounding the renewal of a franchise agreement and their effects on both the franchisor and franchisee

The general practice on the expiry of a franchise agreement has been for a franchisor to grant its franchisee an option to renew the franchise for a further term. Such options, however, are usually subject to various conditions with which a franchisee is required to comply, most of which don’t cause a problem. Clauses such as ‘the franchisee must not be in breach of his or her obligations at the time of renewal’, for instance, are generally acceptable to franchisees.

However, many such options also contain an additional condition – one that is becoming a frequent bone of contention. It usually isn’t queried by a franchisee at the time of signing the franchise agreement but can cause problems at the time of renewal. This is a provision that makes any renewal conditional upon the franchisee releasing the franchisor from any claims that the franchisee may have against the franchisor and which arose during the term of its current franchise.

There is nothing illegal about such a condition but it does raise ethical questions. Franchisors argue that there may be circumstances where a franchisee has a claim against a franchisor, for example, because a franchisor and the franchisee are in dispute over sums owed to the franchisee for goods supplied by the franchisor which the franchisee alleges are defective; or where the franchisee claims not to have received value for money paid by the franchisee to the franchisor for services such as software support or advertising. In the main, most claims can be resolved amicably, but in some cases, particularly if disagreements are long-standing, the parties’ relationship may have become acrimonious – indeed they may have embarked upon legal proceedings. In these circumstances franchisors do not see why they should be forced to enter into another franchise term with a franchisee with whom they are locked in dispute.

Such circumstances do not make for a harmonious relationship between the parties and do not bode well for the future. Franchisors therefore believe it to be perfectly legitimate and reasonable to require franchisees to resolve all outstanding issues or waive any rights or claims they may have against them in return for the grant of new franchise rights. This would have the effect of both parties starting the new franchise term with a
clean sheet.

There is clearly some merit in this argument and therefore such a condition appears to be not unreasonable. In which case, surely ‘what is sauce for the goose is sauce for the gander’? If it is reasonable for the franchisee to release the franchisor why not also have a provision that works the other way around?

Many franchisors have accepted this line of reasoning and provide for a mutual release as a pre-condition to renewal. However, there are others who do not agree because they consider the provision to be too general and therefore able to accommodate any number of unforeseen circumstances. Experience has shown that most disputes between the franchisor and franchisee are financial in nature and franchisors who do not like the mutuality aspect of such a release argue that it is not often – except in the case of a trading account where franchisees buy products from franchisors – that a franchisor has any financial obligations to a franchisee, whereas such obligations on the part of a franchisee are a common feature of most franchise arrangements.

By way of a compromise I would suggest that franchisors, while insisting n the franchisee releasing the franchisor from any claims as a pre-condition to the grant of a renewal, agree to exclude from such a release any arguments which the franchisee and the franchisor may have concerning any trading account between the parties. Such a provision would deal with one of the most frequent sources of problems in this area and should go some way to assuage the franchisee’s fears.

If franchisors are given the last word in the matter, they usually conclude the discussion by stating that if a franchisee has problems with their franchisor (other than those which relate to normal trading matters between the two parties) and feels strongly about it, then he or she would be foolish to want to renew for a further term and thereby compound his
or her problems.

In these circumstances the franchisee probably would be better off not exercising his or her option to renew. After all, generally speaking, the choice of whether or not to exercise the option is entirely that of the franchisee. The franchisor cannot force a franchisee to renew; it can only react when a franchisee chooses to exercise his or her rights.

In these circumstances a franchisee should not expect to have their cake and eat it too.

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