Legal Focus: Operations Manuals
This article appeared in Issue 3#4 (May/June 2009) of Business Franchise Australia & New Zealand
A discussion of the legal regulations and commercial practicalities of Operations Manuals in the modern franchise system.
What are Operations Manuals?
Operations Manuals are a central part of many modern franchise system. They set out the operational rules and requirements of the franchise system and provide important information about the practicalities of running the franchise business.
Do all franchise systems have an Operations Manual?
There is no legal obligation for a Franchisor to have an Operations Manual and in some franchise systems there may be no need for one or at least not a comprehensive one.
Why have an Operations Manual?
There are various benefits for both Franchisors and Franchisees of a well drafted Operations Manual. Most noticeably it clarifies many of the procedures and details of the business which are not covered in the Franchise Agreement. It is neither desirable nor practical to have every aspect of the business set out in the Franchise Agreement. By having an Operations Manual in place, Franchisors can ensure Franchisees know what they are getting into and are equipped to deal with the everyday operation of the business.
While there are no hard and fast rules about what topics should be covered by an Operations Manual some of the issues which are usually addressed include how to deal with customer complaints; the form and timing of any Franchisee reports; and details about regular franchise meetings etc. Of course just because information is provided in the Operations Manual, does not mean that it should not also be addressed in the Franchise Agreement. Any key aspects of the business should be set out in the Franchise Agreement to ensure that these are clearly identified by the Franchisee as binding obligations. The Operations Manual should be used to flesh out these obligations and explain how they are put into practice. There will also often be a provision in the Franchise Agreement that where there is an inconsistency between the Franchise Agreement and the Operations Manual, the Franchise Agreement will prevail.
Can the requirements of an Operations Manual be changed?
Unlike Franchise Agreements (which are difficult to vary once entered into) an Operations Manual by its nature is a dynamic document which will be (or should be) regularly varied and updated by the Franchisor to reflect the development of the franchise system.
What is the legal status of an Operations Manual?
Franchisors and Franchisees are often unaware of the legal status of the Operations Manual and see it merely as yet another document handed over at the commencement of a franchise. It is important for Franchisors to develop an Operations Manual which accurately reflects the business and ensure that it is updated regularly. At the same time, Franchisees should be familiar with the Operations Manual as it contains important obligations in relation to the operation of the business and a breach can have serious consequences.
What happens if a Franchisee does not comply with the Operations Manual?
It is usually an obligation of the Franchise Agreement for the Franchisee to comply with the Operations Manual and a breach of the Operations Manual is deemed to be a breach of the Franchise Agreement. Two things should be noted as a result:
(a) The Franchisee should be aware of the contents prior to signing: It is important that the Franchisee is aware of the contents of the Operations Manual prior to entry into the Franchise Agreement. Franchisors are often reluctant to divulge the contents of the Manual unless and until the Franchisee has entered into the Franchise Agreement. It should be noted however that the provisions of the Manual may be more difficult to enforce if the Franchisee has not sighted the Manual prior to execution of the Franchise Agreement. A practical way to deal with this is to get the prospective Franchisee to sign a confidentiality agreement and to only allow access to the Manual (and not allow the Franchisee to take away a copy).
(b) Relationship with Franchise Agreement: The Franchise Agreement should not state that the Operations Manual is deemed to form part of the Franchise Agreement. Many older agreements state this. However as a result of the recent introduction of a ground for unconscionable conduct being the unilateral variation of an agreement, then the requirement should simply be to comply with the Manual.
Are Operations Manuals regulated by the Franchising Code of Conduct?
There are very few provisions in the Franchising Code of Conduct which specifically relate to Operations Manuals. The only express obligation is for a Franchisor to confirm in the Disclosure Document any reference in the Franchise Agreement to an obligation to comply with any standards or operating manuals.
Franchisors should however be mindful of the Code when enforcing the provisions of Operations Manuals especially if they are deemed to form part of the Franchise Agreement.
What happens if a Franchisee breaches any requirements of the Operations Manual?
The breach of a requirement in an Operations Manual is generally a breach of the Franchise Agreement. A breach notice will need to be served, and the default provisions of the Code otherwise complied with, prior to the Franchisor relying upon a breach of a Manual as aground for termination.
However, given that the obligations in the Operations Manual generally pertain to the procedural aspects of running the business, a breach of a minor procedural obligation is unlikely to be upheld as a ground for termination. That being said, if a Franchisee is repeatedly in breach of the Operations Manual and has failed to remedy the breaches, there may be grounds to terminate the Franchise Agreement. It will generally be addressed on a case by case basis taking into account the type of breach, the Franchisee’s history and the particular obligations of the franchise system.
Should Operations Manuals be kept confidential?
Operations Manuals often contain highly sensitive and valuable business information. Franchisors will usually take steps to protect this by adding conditions to the Franchise Agreement which include the Operations Manuals as confidential information, and require the documentation to be returned on termination or expiry. Franchisors may also state that copies cannot be made by Franchisees. It is important, however, for Franchisees to familiarise themselves with any confidentiality obligations surrounding the use of the Operations Manual and they should ensure that they have an opportunity to peruse the Operations Manual prior to entering into the Manual.
Operations Manuals are more than just another document to be handed over to prospective Franchisees. They are central to the franchise system and set out the basic details for both parties to the agreement. While there is currently few express legal obligations in relation to Operations Manuals, it is important for Franchisors to act reasonably in relation to imposing obligations on Franchisees and making any changes to the manual. At the same time Franchisors should take precautions to protect the confidential information contained in the Operations Manual, both for prospective Franchisees and ongoing Franchisees that may one day leave the system.
Interview with a Franchisor: Evan Bromiley, Mortgage Choice
How do you make your Operations Manual available to Franchisees (e.g. hard copy, electronic)?
Our Manual is available as an online database.
At what stage do you give new or prospective franchisees a copy of the manual?
A copy can be provided on request as soon as a prospective franchisee has signed a confidentiality undertaking. Most often it is provided at the commencement of disclosure with our Franchise Agreement.
What sort of topics are covered in your manual?
How often do you update your manual?
Changes are made every month, varying in scope from very minor changes (eg. updating new Franchisor personnel) to complete chapter rewrites (eg. introducing a new payment model) to keeping up with changes in the way business is carried out (eg. introducing a policy for use of our Instant Messaging system). The changes are made instantly online and the network is advised by email. For significant changes our Franchisee Advisory Council will be briefed in advance to allow for appropriate consultation.
How do you keep the Operations Manual confidential?
Access to the online version is password protected, and requires a Mortgage Choice email account. Franchisees that leave our system are required to return all hard copies in their possession.
Why do you think it is important for a franchise system to have an Operations Manual?
A well written manual is a tool that provides the detail necessary for a Franchisee to run their business and it gives a Franchisor the flexibility it needs to respond to changes in the market.
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