International Law

Tricky Franchisor Lawyer Clauses

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Very interesting thread at Blue Mau Mau about the relationship between due diligence and renewal rights of a franchisee.

"While in the abstract the notion that a franchuisee who was able to pony up hundreds of thousands of dollars to buy into a franchise should not need consumer contract protections may sound pausible, this is typically not what happens to many people.

[Because the franchisee has to renew, if he does, an entirely new franchise contract.]

Can you say with a straight face that he really has a choice and can choose not to sign the new contract even though he disputes every clause in it?

Can you say that this now substantial businessman is in a much different position than a consumer?

I think the consumer is in a better position because they can always choose to walk away. This guy can't. Not really."

I want summarize some of the positions stated in the thread, without attribution to any particular person.

1. The franchisee should have diversified.

2. The renewal clause is misnamed: you get to buy a new franchise at a reduced price at the same location.

3. Courts should not enforce the mere renewal of franchise relations, but should look to see how different the new franchise agreement is.

4.  The new clauses are adhesory, and if material and very unexpected they aren't binding.

5. It is not practical for the franchisee to diversify outside of his multi-units.

6. You don't like the renewal clause, then don't buy the franchise.

These are important issues for any prospective franchisee to consider before signing a limited term franchise contract - you better be sure that the length is sufficient to give you a decent return on your capital invested, but also that the length is short enough for you to bail.  (Yes, I know these are contradictory observations.)

Full post as published by Misleading Advertising Law on February 11, 2009 (boomark / email).