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Franchisees as Consumers

Book Information: 

Franchisees as Consumers is a must-read for regulators, lawmakers and lawyers interested in franchise regulation and the current legal environment. In her book Franchisees as Consumers, legal scholar Jenny Buchan of the University of New South Wales, Australia examines why franchisees remain more vulnerable under the law than employees and suppliers, and what can be done about it.

What is so surprising is how well the book fits both American and Australian franchising issues. In fact, many of her sources of law are well-known American and Australian legal experts, two places in the world with the highest density of franchises per population takes place. It's fascinating how these two countries have such similar problems.

Although legally technical, franchisees could also benefit from understanding their plight from Prof. Buchan's legal research. 

A badly constructed franchise legal environment built on false assumptions

Franchisors and their attorneys speak about where two "sophisticated business investors" have signed a franchise contract, who is the law and the court to split asunder what was agreed upon? Nonsense, summarizes Buchan, quoting various legal scholars on the problems with one-sided contracts, contracts that are necessarily incomplete besides. She writes:

Contract law has been unable to accommodate the franchisor/franchisee relationship appropriately.

Those contracts are of limited value, argues the New South Wales law professor in explaining why proper regulation in America, Australia and elsewhere are necessary. She writes:

Can franchisees protect themselves against the consequences of a rogue franchisor's exploitative, negligent, fraudulent or criminal behaviour by simply negotiating contracts better? The short answer is no.

Buchan goes on to challenge a legal myth she calls "the dated notions of certainty and freedom of contract" in the franchise relationship, which weaknesses cannot possibly deliver a balanced franchise contract. Franchisees are often undone outside their single franchise contract that is set in a point in time, since they are bound by several covenants - covenants that even try to control the unknowable. It's not just franchise agreements that are a problem but also supplier agreements, leases and loan contracts, which are controlled by a franchisor. Should the franchisor go bankrupt, these contracts and ties can arbitrarily be put by the wayside. These various legal constructs significantly impact the franchisee's business. Sadly, there isn't much under current law that a franchisee can do.

Even worse, a franchisor can strategically guide itself into insolvency so that it can throw away its commitments to its franchisees, dropping franchises at seeming will. It turns out that franchisees are lowest of low on the bankruptcy totem pole. Employees, contractors and creditors, which franchise owners are not, come way before.

Where franchise regulation needs to go

Prof. Buchan provides several suggestions on what regulators should look at align franchise owner and franchisor interests in order to address the current holes in the law and subdue the armies of attorneys. The legal construct around franchise agreements must be changed to match the needs of the modern business format franchise arrangement, she argues. Under one-sided agreements in favor of what the franchisor wants, franchise owners are consumers and are best protected under consumer laws. Corporate governance needs to be changed under the law so that the board of directors of a franchisor has a fiduciary responsibility to franchise owners. She argues that the 20th century business-format franchise model and its considerably stronger control over the small business unit has managed to escape such requirements. And finally, Buchan argues that bankruptcy laws for franchisors must be changed to give franchise owners a stake compared to their voicelessness and helplessness now.

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About Don Sniegowski

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Don Sniegowski is editor of Blue MauMau, the daily news journal for franchise & small business owners. Call him at +1 (270) 321-1268, tweet @bluemaumau or email don@bluemaumau.org.