The franchise agreement and the law of contracts
Assuming the franchisor has an operations manual in place, the franchise agreement is likely to address it in a few ways. For example, franchise agreements typically explain the operations manual is the confidential and the property of the franchisor, the franchisee is obliged to comply with all standards and operating procedures prescribed by the franchisor and as set out in the manual, non-compliance with the manual may trigger the franchisor’s right to terminate the franchise agreement and (less commonly) the manual may be ‘incorporated by reference’ and deemed to be part of the franchise agreement.
As the franchise system evolves over the term of a franchise agreement, it is important for the provisions in the operations manual not to conflict with the covenants in the agreement. Herein lies the potential for tension, as both the operations manual and the franchise agreement are integral to the franchise system, but their respective roles and legal statuses are markedly different.
This gives rise to a few questions from an operational and legal perspective:
1. Is the operations manual carved in stone or a living document?
The operations manual can be considered both carved in stone and a living document. It is static in the sense that (a) the obligation to comply with its terms is set out in the franchise agreement and (b) it is a cornerstone of the franchise system. Yet, the operations manual also must be dynamic to properly reflect changes in the franchise system as it develops and grows.
2. How is it updated and does this violate the franchise agreement?
Each franchisor must develop a consistent and reliable system for rolling out any changes to its operations manual. Examples include newsletters and leaflets that are sent to franchisees for insertion into a physical binder and e-mail messages sent via the franchisor’s intranet to distribute digital copies of updates.
Legally, however, before any such changes are made, the franchisor should verify it has the right to update its operations manual under the terms of its franchise agreement. While unilateral amendments cannot be made to the terms and conditions of the franchise agreement, the agreement will typically state the franchisor may make changes from time to time to its operations manual and the franchisee is required to comply with these changes. There may be restrictions in the agreement as to the types of changes that may be made, however, and the franchisor will need to be sure to act on-side of these restrictions. Further, the franchisor must act at all times in good faith, both in its performance of the obligations set out in the agreement and in its choice of what types of changes to make to the manual.
The franchisor/franchisee nexus
The franchisor’s operations manual is intended to function as a guide to help the franchisee emulate the uniformity that has made the franchise system and its brand successful. It also serves to facilitate the evolution of the franchise system over time to maintain competitiveness in the marketplace.
That said, it can also lead to resentment. Franchisees and franchisors alike know there are many challenges involved in running a franchise. It is not always easy for the franchisee to follow someone else’s playbook when running his/her own business, even if doing so can be gratifying and gainful.
It is important, therefore, to keep in mind the central role the operations manual can play in the ultimate success of franchisees. It can be thought of as the nexus between franchisor and franchisee. While franchises are indeed businesses operated by independent owners, they are also part of something bigger, thanks to the brand and the franchise network behind them.
Independent business owners can reap a number of benefits by becoming part of a franchise network and being associated with an already established brand, including, in many cases, a pre-existing customer base. In return, the franchisor primarily asks for two things: (a) compensation through fees and royalties; and (b) the franchisee’s promise to meet and follow brand standards to help ensure the uniform sale and delivery of products and services across the system. Some of these standards are spelled out in the franchise agreement, but most of them will be found in the operations manual.