Getting on speaking terms

Today franchisees are increasingly better informed not only about their rights but also about various ways in which they can bring pressure to bear on their franchisor with whom they may be in dispute.

Franchisors on the other hand, particularly those facing increased competition, will be passionate about the need to protect their reputations.

Provisions in franchise agreements, which are usually referred to as non-disclosure clauses, have been commonplace for some time. These are clauses that prohibit a franchisee from disclosing to third parties (other than their professional advisors) the contents of their franchise agreements, details about their franchised businesses or that of the franchisor and the method of operation of a particular franchise.

The reasons for such a prohibition are obvious. Franchisors spend a good deal of time and money establishing the wherewithal to franchise and therefore seek to guard cautiously those matters they perceive to be their trade secrets, including the franchise agreement. Having said that, some franchisors freely distribute copies of their franchise agreements at a very early stage of discussions. Others, however, are reluctant to part with a copy of their franchise agreement until they are fairly certain that the franchisee will be proceeding.

However, a different kind of nondisclosure provision in a franchise agreement is becoming commonplace. This seeks to restrict the franchisee from discussing with or disclosing to a third party, generally anything about the franchise, and in particular anything about a dispute a franchisee may have with his franchisor or indeed any dissatisfaction with the franchise or the way in which it is being run. Is it such a bad thing? I suggest not.

Most commercial enterprises would prefer not to air any grievances they may have with their trading partners in public and franchisors are no exception. In particular, in my experience, the motives behind such a disclosure by a franchisee are usually tainted with malice and seldom used as a legitimate means of resolving grievances.

More often than not it is used by franchisees as a threat to bring the franchisor to heel in the – mistaken – belief that (in some cases at least) by making such disclosure/revelation or more usually, in threatening to do so, the franchisor, fearing damage to its reputation, will change its behaviour.

Provisions to counteract this occurence have always existed in most franchise agreements in some form. Most franchise agreements have long contained clauses, which restrict franchisees from doing anything detrimental to the reputation of the franchisor or its brand, the breach of which would result in the ultimate sanction of termination of the franchise agreement.

What is different about these clauses is that they are more direct in expressing – in a way that previously was only implied – the franchisor’s intention to act as a deterrent and a warning to the franchisee.

Some would argue that by including such a provision, franchisors appear insecure and possibly paranoid and that any franchisor who deals fairly and ethically should have no difficulty in weathering a storm whipped up by a franchisee. But at the end of the day, if a franchisee, by its conduct, adversely affects the reputation of a franchise, this will adversely affect not only the franchisor but also the franchisee itself and all other members of the network.

Whether or not such a provision is enforceable at law will depend on the circumstances of each case. The clause is a safeguard for both parties, however, as franchisees should be aware that if they openly air their grievances through the media, they may find themselves at the receiving end of an injunction restraining them from doing so further and a claim for legal costs and for damages to that franchisor’s reputation.

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