Consultation on Franchise System Changes: a Two-Way Street

Author: aship@mccarthy.ca

Date: MAR 18th, 2014

Topic: Industry Experts

Franchisors are often required to evolve their products, services, and business operations in order to remain competitive in their markets and sectors. When designing and implementing system-wide modifications – referred to by lawyers as “system changes” – franchisors are often well-advised to engage and consult with their franchisees. Franchisee consultation is generally considered to be a prudent business practice, since franchisees can be a source of valuable guidance, especially about their local markets, and wide franchisee support for a proposed system change can greatly assist the franchisor. In addition to being a sound business practice, meaningful franchisee consultation can be significant as a legal matter, as a component of the duty of good faith and fair dealing that plays a foundational role in the franchise relationship.

However, it must be remembered that consultation about system changes is a two-way street, i.e., “it takes two to Tango”. Franchisees who truly wish to influence proposed system changes need to take an active role in the consultation process. This makes good business sense if a proposed system change has the potential to affect your local business; it can also make good legal sense, as it is more difficult to complain about something after-the-fact when you didn’t bother to engage in advance.

An important Ontario franchise law decision, Fairview Donut Inc v TDL Group Corp (2012 ONSC 1252, affirmed 2012 ONCA 867), provides a helpful road map to franchisors on how to comply with the duty of good faith through a meaningful consultation process. Fairview Donut related to two system changes in Tim Hortons franchises: a shift from donuts baked from scratch to donuts “par baked” from frozen, and the expansion and pricing of Lunch Menu items. A group of franchisees who were unhappy with these changes brought a proposed class action alleging, among other things, that the franchisor had breached its duty of good faith. The Court dismissed franchisees’ good faith claim, in large part because the franchisor had ongoing and transparent consultations with franchisees at various points in the process of finalizing and implementing the system changes. You should anticipate some franchisors, who are up to date on the law, to look to Fairview for guidance on this point and to create opportunities for franchisees to play an consulting role on important system changes.

Who truly wish to play a role and potentially influence the decision should take these opportunities and actively engage in consultation processes. This is not only to assist franchisees in protecting their interests in the event a dispute arises, but more importantly is a prudent business practice for everyone involved. Franchisors are often interested in having franchisees involved in system change decisions to get their input. The franchise system as a whole benefits when franchisees can voice their views from on-the-ground and local experience and offer practical business perspectives. Participation in consultation opportunities also allows franchisees to engage with other franchisees in their systems, share experiences and opinions and collaborate on new processes.

Franchisees want to potentially influence system-wide decisions, it will take some work on their part. Franchisees need to ask to have a seat at the consulting table. This may require taking active steps. In the event a franchisee is unhappy with a decision, the courts may be unsympathetic to a legal claim made after-the-fact where the franchisee declined meaningful opportunities to be involved in the process beforehand.

Sometimes the franchise agreement will provide for a consultation process. In this context, franchisees who wish to influence the outcome of a proposed system change should actively use this agreed-to process and make their views known on a particular issue. Franchisees with particular interests in system-wide issues may consider getting involved in a franchisee or dealer advisory committee, either by acting as a local representative, or reaching out to the committee when a change is proposed. These methods of engagement apply not only to system changes, but also to any other franchisor decisions that have an impact on franchisee interests.

Although a franchisor does not have a duty to prefer franchisees’ interests over its own, franchisors are required to give due consideration to franchisees’ legitimate interests. But it is much easier for franchisors to consider franchisee perspectives if franchisees come to the consultation table.

Most importantly, actively engaging in franchise decision-making processes will allow all stakeholders to benefit from diverse perspectives, and will help to prevent disputes before they arise.