Law Society's franchise agreement plan under fire

The Auckland District Law Society Inc (ADLSI) has announced that it has begun work on a standard franchise agreement to be developed by franchise specialist lawyer Chris Bradley of Duncan Cotterill. In its February newsletter, ADLSI says it ‘feels that the development of an industry standard form with the backing of the widely respected ADLSI brand will increase commercial confidence in the reliability and financial feasibility of the franchise system, expanding the market as a result.’

‘ADLSI is also confident that the development of this form will increase the demand for legal services connected with the franchise industry and help to move this form of business structure towards the forefront of commercial legal practice.’

But Stewart Germann, one of New Zealand’s most experienced franchise lawyers, has condemned the plan. ‘I was originally approached by the ADLSI to draft the form of standard Franchise Agreement and declined because I believe it is completely inappropriate to have one. A franchise is not like a house sale and purchase agreement, or even a normal business sale and purchase – it involves an ongoing relationship with a lot of variables. You can’t just give lawyers a blank form with a lot of spaces to fill in and expect them to create a legally binding document that will properly manage the development of that relationship over five years or more.’

In a letter to ADLSI, Mr Germann says, ‘It is misleading in my opinion to tell the profession that ADLSI will produce a form which can be widely used as you are holding out that it will be accepted and basically “foolproof”. That is a dangerous road to go down. You cannot say that your form “will increase commercial confidence in the reliability and the financial feasibility of the franchise system, expanding the market as a result”. With respect, that statement is wrong and misleading, as well as dangerous.’ He called for the statement to be retracted.

For new franchisors, the creation of a franchise agreement can be an expensive process, with the cost varying from perhaps $7,000 to over $20,000, depending on the complexity of the franchise system, the amount of preparatory work that has been done and, of course, the lawyer used. As an indicator, the ADLSI sells the 4^th edition of its ‘Agreement for Sale & Purchase of a Business’ at $96.00 for a pack of ten.

Potential for Disputes

The 2008/2009 review of franchising by the Ministry of Economic Development identified that one of the issues in the sector was the failure of people buying a franchise to take proper legal advice. Critics of the ADLSI plan believe that problems could increase exponentially if new franchisors are encouraged by the availability of a cheap standard document to launch under-developed or inadequately protected franchises on to the market.

‘It’s interesting to note that the ADLSI claims that the development of this form will increase the demand for legal services connected with the franchise industry,’ says Win Robinson of Franchize Consultants, the winners of the Service Provider of the Year title at the Westpac New Zealand Franchise Awards. “You have to ask what they mean by this. Will the availability of a cheap format agreement encourage more people to franchise without proper preparation? Will it encourage them to use non-specialist lawyers who don’t have the experience to spot the many pitfalls that are a trap for unwary franchisors? Will it enable fly-by-night operators to complete the standard agreement themselves, thereby cutting out lawyers altogether? In each of these cases, the ADLSI runs the risk of endangering both new franchisors and their franchisees. The only increase in demand for legal services will then come from the continual disputes that result.’

‘At the moment, the level of disputes in franchising is commendably low – around 2% according to the 2010 Survey of Franchising. Promoting a standard form of franchise agreement has the potential to increase that figure substantially.’

Financial Feasibility Claims Challenged

Win Robinson also takes issue with the ADLSI’s assertion that ‘the development of an industry standard form with the backing of the widely respected ADLSI brand will increase commercial confidence in the reliability and the financial feasibility of the franchise system.’

‘I am not aware of any specialist franchise lawyer in this country who does the financial feasibility study for a franchise business system,’ Mr Robinson says. ‘They are simply not qualified to do so, nor should they be asked to take on such a responsibility. How can a lawyer know what the appropriate fees, or term, or franchise structure is for any business unless a proper feasibility study has been done? They can’t know, and shouldn’t be asked to guess. Best practice in this area is typified by the British Franchise Association, which requires that franchise lawyer members must have seen evidence of a proper feasibility study before they draft any franchise agreement. Similar proposals are currently before the Franchise Association of New Zealand. To the best of my knowledge, no country in the world publishes a “one size fits all” agreement of this type and the ADLSI are totally wrong to suggest that a standard form agreement will increase commercial confidence in the financial feasibility of the system – it will do the exact opposite.’

The plan is also attracting negative comment internationally - see separate story.

No Negatives

Chris Bradley, who is drafting the standard agreement for ADLSI, is surprised to hear of the reaction to the announcement and says that he can’t see any negatives in people having access to a fair and reasonable form.

‘I get briefs to put together franchise agreements for new systems, and those people that use consultants and want to do a thorough job won’t use this form. They will work with their lawyers to put together a substantial document. In creating such a document you go through a range of choices: length of term, territory, royalties, etc. You need expertise that understands these things and the people with real money will still employ that expertise.’

‘This standard agreement is aimed at those who copy other people’s agreements or write their documents on the back of a postage stamp. It’s not going to create an industry that doesn’t already exist: if someone wants to hawk a coffee machine or sunbed franchise up and down the country they’ll do so. They’ll get a lawyer to knock a document up for them, probably copied from somewhere else. I’ve seen plenty of people get into franchising with really scabby documents. A standard agreement isn’t going to change anything other than provide a resource for low-budget operators to have a better document available to them.  For example, I’m building in reference to dispute resolution procedures with the Franchise Association’s Disputes Panel as a first port of call. It will help to point those without money in the right direction.

‘Some franchise lawyers will look at this as a threat, but I don’t think it will take any work away from them that they would have got before. I would hope this agreement will be used by lawyers advising people who would otherwise use untidy and dangerous documentation. I’ve had support from several other franchise lawyers – after all, a better document is better for all.’

Overseas objections to ADLS plan

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