Recent Trends in Franchise Relationship Laws

7.6 Restrictions on Arbitrarily Refusing Renewal

Some jurisdictions have included a right to renew in their franchise legislation.  Absent such legislation, and where no renewal provision is explicitly included in the franchise agreement, the franchisee’s rights would expire at the end of the agreed term with little or no compensation to the franchisee who developed the business at the location.  Conversely, the franchisor could appropriate the location and goodwill through the award of another franchise or operation of a corporate site.  Despite this inequity, the majority of jurisdictions have left renewal to the discretion of the parties.  This is due, in part, to the ongoing struggle between, on the one hand, proponents of freedom of contract who view franchise agreements as commercial contracts, and on the other hand, advocates of franchisee protection who view franchise agreements as contracts of adhesion.  The reality, however, is that franchise agreements are rarely freely negotiated and therefore some jurisdictions have found the need for statutory intervention to protect franchisees from renewal provisions drafted in the franchisor’s favour.

In the United States, for example, Delaware, Hawaii, Iowa, New Jersey, Rhode Island, and Wisconsin have relationship laws requiring good cause for non-renewal.  In Mississippi, Washington, and Missouri the franchisor must provide the franchisee with notice ranging from 180 days to one year.  Illinois, Michigan, and Washington have what are called forced renewal rights requiring a franchisor to renew the franchise agreement or repurchase the franchise. For example, in Illinois a franchisor must renew a franchise agreement or repurchase the franchise where a non-compete covenant exists.  Malaysia takes a similar approach requiring a franchisor to compensate its franchisee by repurchase or some other means where renewal is refused.  Both the Russian and Lithuanian approach to renewal is also somewhat interesting.  For instance, in both these countries there is an automatic right of renewal if the franchisee has not been in breach of the franchise agreement and the renewal takes place on the same terms as the original agreement. The franchisor, however, can choose not to renew provided it abstains from opening a franchise in the same territory in the next three years, or, where it wishes to open a franchise in the same territory, it first offers that option to the original franchisee on the same terms as the original agreement.  In Canada, while there are no explicit renewal laws, under the duty of good faith and fair dealing, if the franchisor-franchisee have a history of renewal it may prevent the franchisor from refusing a subsequent renewal.

7.7       Restrictions on Transfer and Assignment

Relationship laws dealing with the right to transfer prevent a franchisor from prohibiting a franchisee from transferring his or her interest in the franchise.  In the absence of legislation, transfer and assignment rights are governed by the terms of the franchise agreement and the law of contract.  The abstention approach is favoured by proponents of the freedom of contract camp who believe a franchisor should be free to restrict a franchisee’s ability to transfer its rights and obligations on the rationale that a franchisor’s grant of rights to a franchisee is based, in part, on the personal characteristics of a franchisee.  On the other side of the argument are supporters of franchisee protection who consider relationship laws to be a sort of counter-weight to franchisor power and propensity to abuse rights.  What has resulted is legislation which endeavours to strike a balance, protecting vulnerable franchisees while upholding freedom of contract and the franchisor’s right to approve a new owner.

In the United States, for example, nine states, namely, Arkansas, California, Hawaii, Indiana, Iowa, Michigan, Minnesota, Nebraska, and New Jersey have enacted relationship legislation limiting the franchisor’s discretion to refuse to consent to a transfer.  Arguably, the most restrictive of the bunch are the Hawaiian and Michigan statutes which deem it unfair or a deceptive act to refuse to permit a transfer of a franchise without good cause.  To determine good cause the legislation considers, among other things, whether the proposed transferee fails to meet the franchisor’s reasonable qualifications or standards, whether the proposed transferee is a competitor of the franchisor, the inability or unwillingness of the proposed transferee to agree in writing to comply with and be bound by all lawful obligations imposed by the franchise, and the failure of the franchisee or proposed transferee to pay any sums owing to the franchisor and to cure any default in the franchise agreement at the time of the proposed transfer.  In Arkansas, Nebraska, and New Jersey the franchise relationship laws go further and impose specific transfer procedures on both franchisor and franchisee.  The procedure requires a franchisee to provide a franchisor with both notice and details of any proposed transfer.  The franchisor must then approve the transfer or provide the material reasons why consent to a transfer is being withheld, based upon the character, financial ability, or business experience of the proposed transferee.

The approach in Australia is largely similar to that of the United States.  The Franchising Code provides that the franchisor may not unreasonably withhold consent to a transfer and provide specific instances where it would be reasonable for a franchisor to withhold consent, including, for example, where the proposed transferee is unlikely to be able to meet the financial obligations under the franchise agreement, does not meet a reasonable requirement of the franchise agreement, has not met the selection criteria of the franchisor, or does not agree in writing to comply with the obligations of the franchisee under the franchise agreement.  The franchisor can also withhold consent where the agreement to the transfer would have a significantly adverse affect on the franchise system, the franchisee has not paid or made reasonable provision to pay an amount owing to the franchisor, or the franchisee has breached the franchise agreement and has not remedied that breach.  In Canada, the duty of good faith and commercial reasonableness probably imposes the same standard.