A number of high profile court battles have illustrated very clearly that franchisors can no longer rely on the fundamentals of the franchise agreement, no matter how tightly they think their lawyers have buttoned it up.

Because awards in court cases – up to £150,000 in some instances – are only the tip of the iceberg. Without the armour of PI, franchisors can be saddled with unbearable costs and expenses, not to mention the unquantifiable cost of reputational damage.

It is perhaps hardly surprising, in these litigious times, that instances which might previously have been hammered out by full and frank discussions between the protagonists now end up under the judicial microscope.

The franchisor/franchisee relationship is quite unusual in business and has to be carefully nurtured on both sides. It is quite unlike the relationship between head office and a branch manager, where one side issue orders and the other implements them.

With a franchise, the deal is between an established entrepreneur and a would-be entrepreneur. The latter is buying into the former’s vision and, in return for his franchise fee, has a reasonable expectation that the spoils he is promised will materialise in good order.

There are innumerable reasons why that might not happen, not least failings on the part of the franchisee. But if a franchisee fulfils all his obligations and duties under the agreement, and success does not timeously follow, he might start asking awkward questions, such as: was his training adequate; was there misrepresentation of the figures; and was the franchisor in any way negligent in term of the business template?

In this case, the franchisor may find that the £300 to £400 pa cost of PI premiums is about to pay off in spades. Because once a dispute ends up in court, there is no telling which direction it will take.

In one dispute just over a year ago, the franchisor accepted that it would be liable for any statements made fraudulently, but the judge decide that it was also liable for any failure of duty of care.

A  duty of care arises between claimant and defendant where there is a sufficiently close and proximate relationship between them (the judge clearly felt that a franchisor/franchisee relationship fitted the bill here) and where it is fair and reasonable that the defendant should have a duty of care.

It might be expected that disputes of this nature, requiring cast iron professional indemnity on the part of the franchisor, would become more frequent as franchises expand and the attention of the franchisor is divided among ever greater numbers of franchisees.

In fact, they can arise every bit as frequently in the early growth stages, when the franchisor is effectively still refining his business model and the franchisee, to some extent, is fulfilling the role of guinea pig.

In an ideal world, differences of opinion and disputes about strategy could be resolved by open and transparent discussions, with the guiding principle being a fair shake for all.

But, human nature being what it is, franchisors would be well advised to make sure they have the strength of high quality PI around them. After all, you didn’t build a business just to have someone else cost you your house.

Maurice Logie is director of Moreland Insurance.

For further information, contact Maurice Logie, director, Moreland Insurance Brokers, 117 Cadzow Street, Hamilton, South Lanarkshire ML3 6JA . T: 0845 1800 500. www.morelandinsurance.co.uk.

I asked him to list out where they spent their marketing budget. His answer:

• Creative Company
• Leaflets
• Posters
• Advertising
• PR
• SEO
• Website Development

The list was pretty good. I was impressed. They definitely were not shying away from spending money on marketing.

There was a problem, however. His franchisees were still complaining to him that they weren’t seeing return for their marketing levy. They weren’t happy, and they were letting him know about it.

He asked me the question: How can that be?

From my view it’s pretty simple. Just because you’re spending money doesn’t mean it’s money well spent. If you spend £70K on an advertising campaign that only generates £20K worth of business, do you really think people will be congratulating you on investing so much on your marketing? Like hell. They’ll be asking you why you wasted all that time and money with no reward to show for it.

You don’t get points for trying. You get points for results.

Back to my conversation. I more or laid out this same idea to him. The reason his franchisees were unhappy was that they weren’t seeing any benefit from the marketing spend. From their perspective, all they were seeing was money flying out the door. It never seemed to be coming back in.

Sure they got the leaflets delivered every month, and yes they were very pretty. But there was nobody helping them with what to do in their territory. Nobody really helping them get the most out of what they had to work with.

Now THAT is where local marketing comes in.

And the even better news?

It’s normally cheaper and more effective.

How? It’s a simple numbers game.

Let me give you an example. Say our franchisor decides to put on an offer and send it out to all of his network. He prints up 500,000 leaflets and gets them distributed to all 50 of his franchisees. It’s the same offer to everyone, with no recognition of the differences between the different local markets.

Now in this scenario, only about 15 of his network thinks that the offer will work in their territory. 15 out of 50. If we assume that they will only use about 30% of the printed leaflets, the numbers start to get scary:

500,000 Printed Leaflets: £5000

Distribution to 50 Franchisees: £500 (£10/franchisee)

Total Expenditure: £5500 (£110/franchisee)

Sure that’s not a lot of money. Only £110 per franchisee.

But hang on. Only 15 of the 50 are going to use the campaign, and they will only use 30% of the leaflets. If we look at those numbers we really only need to print up 45,000 Leaflets. That’s a much more targeted way of doing a marketing campaign – send out the most effective materials for those areas. The numbers look better:

45,000 printed Leaflets: £650
Distribution to 15 Franchisees: £150 (£10/franchisee)
Total Expenditure: £800 (£54/franchisee)

See any difference? We can make it even more brutal:

Total spent on mass campaign: £5500
Total spent on targeted campaign: £800
Wasted Marketing Spend: £4700

That’s 85% of the campaign budget being flushed away.

THAT is the importance of local marketing.

THAT is where franchises need to focus on.

And if you want to know more, give me a shout.

- Jordan

(This article was originally written at www.franchisemarketingsystem.co.uk – please contact Jordan directly if you’d like to learn more about Designate’s unique local marketing systems for franchises)

The mandatory pre-contract disclosure, created in 1989 (with the so called Doubin law), is now to be found under article L.330-3 of the Commercial Code.

The very purpose of the law is to give the prospective franchisee (considered as the weaker party in the contractual relationship with the franchisor) the possibility to obtain specific prior information from the franchisor to allow it to enter into the agreement with full knowledge of the facts.

Article R.330-1 of the same code gives a detailed list of what must be included in the disclosure document. In brief, the document must contain five sections:

1. Information on the franchisor (corporate information, financial information, but also history of the company, information on its owners, their experience, information on the trademark used by the franchisor);
2. Information on the network (list of the franchisees, list of the members of the network who left in the past 12 months and the reasons why they left);
3. Information on the contract (scope of the exclusivity undertakings, term, renewal conditions, termination, transfer, post-term non-competition undertakings) but also a draft of the franchise agreement itself;
4. Information on the expenses and investments to be made by the franchisee at the start and in the course of the business (including the royalty fees);
5. Information on the general and local state of the market plus a market development outlook.

This information must be communicated to the prospective franchisee at least 20 days before the signature of the franchise (or master franchise) agreement or, as the case may be, 20 days before payment of any amount of money to the franchisor (e.g. for being granted an exclusive negotiation right on a particular area).

Non-compliance with these rules is criminally sanctioned by a fine of Euros 1,500 and may lead a Court to annul the entire agreement and/or grant damages to the franchisee if the Judge considers that the consent of the latter has been vitiated.

As a consequence, although the sanction is not automatic, abstaining from giving all or part of the information required may lead to annulment of the agreement.

That being said, it is worth bearing in mind that French Courts consider that any important information that could influence the prospective franchisee’s choice to enter into the agreement, should also be disclosed by the franchisor, be it or not in the list of article R.330-1 above cited.

Are these rules applicable to foreign franchisors?

The answer is definitely yes if the parties choose French law to govern their franchise or master franchise agreement.

The answer is more uncertain if the parties choose a foreign law (for example English law).

Indeed, although the parties may freely choose the law governing their agreement pursuant to article 3 of EC Regulation n° 593/2008 of 17 June 2008 on the law applicable to contractual obligations (Rome I) it is worth noting that article 9 of the said Regulation provides that “nothing in this regulation shall restrict the application of the overriding mandatory provisions of the law of the forum” being mentioned that “overriding mandatory provisions are provisions the respect for which is regarded as crucial by a country for safeguarding its public interests, such as its political, social or economic organization, to such an extent that they are applicable to any situation falling within their scope, irrespective of the law otherwise applicable to the contract.”

In a ruling of 30 November 2001 (n° 1999-21972, Cohen vs Société Punto FA SL) the Paris Court of Appeal decided that the Doubin law was mandatory in domestic contractual relationships but was not an overriding mandatory rule that would be applicable to international contracts if the parties have chosen a foreign law.

In other words, the choice of a foreign law would exempt the franchisor from drawing up and making available the pre-contract information provided by French law.

However, the Supreme Court has still not had any opportunity to adopt a position on that question.

Therefore, the debate remains open. It is all the more so true that the decision rendered by the Paris court has been criticized by many, on the ground that the Doubin law is criminally sanctioned and  should therefore be considered as overriding mandatory provisions.

In such a context, in order to avoid having the sword of Damocles hanging over their heads, foreign franchisors would be well advised to comply with the requirements of French law on pre-contract disclosure.

If you are interested in knowing more about French franchise law, please contact Gregoire Toulouse at g.toulouse@taylorwessing.com