Typically, franchise relationships are formalised through contracts which state the nature of the relationship between the franchisor and the franchisee. Consequently, these contracts are known as relational contracts and are left incomplete purposely. The reason for this is that it is impossible for either party to foresee what issues they will have to deal with over the course of the franchisor – franchisee relationship that has the potential of spanning years or even decades.
The legislature often struggle to understand incomplete contracts. Franchise disputes also reflect the fact that at every level in franchise systems there is a tension between ownership and control. This is direct result of the nature of the franchisor – franchisee relationship itself. Most people tend to think that ownership and control are one and the same thing. This assumption comes about due to the nature of a typical business (a non – franchised business) in which ownership and control are largely in the same hands. Ownership refers to the individual (person or entity) is legally entitled to the business’ net assets. Control refers to the individual who makes the executive decisions as regards to business strategy. In a typical business the business owner owns the assets and makes the decisions about which direction the business will take and how it execute on this strategy. However, in a franchise system, the franchisor makes most of the strategic decisions, particularly those that affect the franchise brand. In some cases, franchising contracts grant entities known as master franchisees the power to control the franchising activities in specific regions. These franchisees may make local decisions but the franchisees themselves often have little input even though their assets are the ones at risk.
Poorly communicated information can lead to disputes. This may be poor communication in KPI (Key Performance Indicators) targets communicated to the master franchisee or miscommunication on the development targets. All the same, this miscommunication leads to disputes.
Unfeasible KPI’s and Targets
Franchisors may demand continual improvement on the part of the franchisee. Remember that the franchisee has their assets at risk when they enter into this franchise relationship and as such, they are the ones to bear the costs of this continual improvement. Another typical demand is for the franchisee to increase market coverage which may add further strain on the franchisee’s assets. This seemingly unfeasible targets may lead to a dispute.
Failure to meet KPI’s and Targets
As with any business, KPI are an essential tool to diagnose if the business is well on track to being successful. As such, franchisors may dictate which KPI’s the master franchisees should meet. Note that these KPI’s may be in the form of contractual development targets that the master franchisee must achieve. Disputes arise when the master franchisee fails to meet these development targets. Research shows that most master franchisees do not meet performance targets.
Failure to terms of supply
Franchise – franchisor agreements often have clauses in which the franchisors dictate which suppliers meet their standard of quality. They often approve suppliers of goods and services from pre – specified companies that they have long – standing relationships with. The same applies for software supplies. Franchisees, on the other hand, may have local suppliers who they feel they have better relationships with and so may opt to source their supplies from these suppliers. This is obviously a breach of the franchise agreement. As such, failure of dealing with the franchisor – approved suppliers on the part of the franchisee can lead to a dispute.
Misuse of trademark
Trademarks are a key item in the franchise’s brand. As such, they are only allowed to be used under very specific conditions in the franchise agreement. Any misuse on the part of the franchisees (such as using the franchise’s logo for personal promotion or use) during or after the end of the franchise is a source of dispute.
Disclosure of trade secrets
Most franchisors have a competitive advantage in their capabilities or knowledge. This knowledge is treated as confidential information and is shared with the franchisee under the franchise agreement. Any disclosure of this information to other parties voluntarily or involuntarily in a manner that so breaches the terms of the franchise agreement can lead to a dispute.
Whenever one of the parties within a franchise system lodges a claim, the typical response is for the counterparty to lodge an even larger counter claim. A franchisor might claim that the franchisee has not been acquiring goods from the suppliers the franchisor has approved. The franchisee, in turn, may claim that it has not been receiving the support it needs and was offered under the franchise agreement. Generally, it is important to be cognizant of the terms within the franchise agreement to avoid the pitfalls that may lead to these disputes.