Trading confidentiality

A new type of clause is becoming commonplace in franchise agreements to safeguard the relationship between a franchisor and franchisee. Legal expert Manzoor Ishani simplifies the most important contract you'll sign

Franchisees are increasingly better informed, not only about their rights but also about the various ways they can bring pressure on their franchisor with whom they may be in dispute with. Franchisors, on the other hand, are passionate about the need to protect their reputation, particularly those facing increased competition.

Provisions in franchise agreements, usually referred to as non-disclosure clauses, have been commonplace for some time. These are clauses that prevent a franchisee from disclosing to third parties the contents of their franchise agreements, details of their business, or that of the franchisor, and the method of operation of a particular franchise.

The reasons for this are obvious: franchisors expend a good deal of money in establishing the franchise and so it isn't surprising that they guard confidential matters. Having said that, it does depend on the franchisor. Some franchisors freely distribute copies of their franchise agreements to prospective franchisees at a very early stage. Others are more reluctant to do this until they are fairly certain that the franchisee will be joining the network.

However, a different kind of non-disclosure provision is becoming more common. This seeks to restrict the franchisee from discussing with or disclosing anything about their franchise to a third party that is not specifically authorised by the franchisor and, in particular, anything about a dispute or any dissatisfaction the franchisee is experiencing. 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, 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) in making such disclosures or revelations public or, more usually, in threatening to do so, the franchisor will be so afraid of what it rightly or wrongly perceives and will be the ensuing damage to its reputation.

In practice, such provisions have always existed in most franchise agreements. Most have long contained clauses, which restrict franchisees from doing anything that might damage the reputation of the franchisor or its brand, the breach of which would result in the termination of the agreement. What is happening now is that the new clauses effectively spell out, and are therefore intended to act as a deterrent and a warning to the franchisee. Some would argue that by including such a provision, franchisors exhibit signs of insecurity and that any ethical franchisor should be able to weather a storm whipped up by a franchisee.

Ultimately, 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.
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, quite possibly, a claim for damages from the franchisor.

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