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Questions and Answers with Bill Morgan, Consultant at Morgan Mac Lawyers

Morgan Mac Lawyers specialise in Commercial Litigation, Dispute Resolution and Franchising.

We work with our business clients to understand their commercial objectives so that we are better placed to help them to resolve or navigate legal matters and obligations in the context of their businesses. We recommend strategies to clients that minimise and manage the risks of legal non-compliance and legal disputes

 

Bill Morgan shares with us his approach to resolving disputes and some common issues he has help resolve over his long career in Commercial Litigation and Dispute Resolution.

 

  • As a Franchise Dispute Resolution lawyer, what are some objectives you aim to achieve for your clients?

 

My focus is on early resolution of franchise disputes, and I have been very successful over several years resolving disputes early and avoiding the expense of legal proceedings going to a trial or final hearing in Court.

 

  • With 24 years of practice in Commercial Litigation and Dispute Resolution, what is your approach to resolving franchise disputes?

 

In my experience the implementation of a strategy to resolve a dispute is essential to resolving the dispute as quickly and inexpensively as possible.

 

A strategic approach to dispute resolution may be contrasted with a process driven approach.  For example, a minimal level of legal competence is needed for a lawyer to commence or defend a legal proceeding, comply with the court rules, and ensure that a matter is ready for trial.  A process driven approach is sufficient for a party that wishes a matter to proceed to and be ready for trial and for a dispute to be resolved by judgment of the Court.

 

It is difficult to imagine too many circumstances in which a party in a franchise dispute would wish for a matter to be decided at a trial.  Of course, franchise disputes do sometimes end up being decided by a judgment of the Court, often after a lengthy and expensive trial.  

 

The purpose of a litigation strategy is to ensure a legal dispute does not proceed to trial and is settled as early as possible, preferably before legal proceedings are commenced. This is what I seek to achieve for my clients.

 

My experience is that it is difficult to imagine many situations in which attempting to resolve the dispute by negotiation or an alternative dispute resolution process such as mediation is not a key factor in any litigation strategy.

 

At the same time, a litigation strategy must comprehend the risk that a franchise dispute is not able to be settled before the commencement of legal proceedings and may proceed to trial.

 

Litigation strategy works best for me when it maximises my client’s leverage in settlement negotiations while simultaneously putting it in the best position to succeed if legal proceedings cannot be avoided.

 

Litigation strategy seeks to achieve both the legal and commercial objectives of a party. For example, a franchisee’s objective when faced with a franchise dispute may be to exit the franchise.  A franchisor’s objective may be to facilitate the exit by a franchisee from its franchise and in other situations, the objectives of the parties may be to continue or extend the term of a franchise agreement by changing the conditions or terms under which the franchisee operates the franchise business.

 

As part of the Morgan Mac Lawyers team, I consider it is important to identify what my client wants as an outcome.  The first question I ask my clients who are involved in a franchise dispute is what do you want to achieve?  What is your ideal outcome?  Without knowing the answer to these questions, it is difficult to implement an effective litigation strategy to resolve a franchise dispute.

 

  • From your many years of experience in dealing with franchise disputes, do you see a common theme in franchise disputes?

 

At Morgan Mac Lawyers, I have seen many causes of disputes and too many disputes to mention. However, one issue that arises again and again is franchisees complaining that they do not receive adequate support from franchisors.

 

If franchisees do not receive what they see is enough support, they start to question what benefits they receive in return for the franchise fees they pay and whether they are better off operating their own independent business without the need to pay franchise fees.

 

This questioning of the benefit in remaining in the franchise system is likely to increase over time as a franchisee becomes more confident running the business and begins to think he or she can run the business without the franchisor given the perceived lack of support the franchisee receives from the franchisor.

 

Eventually, the franchisee wishes to exit his or her franchise agreement.

 

The other big issue is the franchise business being unprofitable or marginal. Morgan Mac Lawyers have acted for many franchisees who were running unprofitable or marginal franchise businesses and assisted many of these clients exit their franchise agreement and operate the same business after rebranding the business. 

 

The fact that these clients were able to operate their rebranded businesses more independently without the burden of paying franchise fees often converted marginal franchise businesses into profitable independent businesses.

 

  • What does an exit strategy mean?

 

An exit strategy is one type of litigation strategy to resolve a dispute in which either the franchisee wishes to resolve a franchise dispute by exiting the franchise relationship with the franchisor or the franchisor wishes to allow the franchisee to exit the franchise relationship.  If both the franchisor and the franchisee wish to bring the franchise relationship to an end, it makes it easier to resolve the dispute.

 

As part of the Morgan Mac Lawyers team, I have found this approach to be the most useful strategy for resolving franchise disputes.  The trend in the franchising industry over the last several years is not to seek to hold unhappy franchisees to a franchise agreement if an exit can be agreed.

 

Participation in mediation is to be preferred to Court proceedings when either party’s or both parties’ objectives is to enable the franchisee to exit the franchise relationship.

 

  • Why is mediation a better process than Court proceedings for implementing an exit strategy?

 

Legal proceedings are adversarial by nature.  The parties oppose each other with the aim of being successful in the proceeding and obtaining a judgment against the other party.  Although legal proceedings may be detrimental to the interests of both parties, even to a successful party, because of the costs of litigation and potential harm to a party’s reputation, there is ultimately a non-confidential Court imposed solution to the problem in which one party is successful and the other party is unsuccessful.

 

An exit strategy requires and is best served by cooperation between the franchisor and the franchisee.  As mediation is designed to facilitate the parties moving from entrenched positions to a forward-looking resolution of the dispute that allows the parties to move on from the dispute, it is an appropriate mechanism for allowing parties to reach an agreement on how a franchisee will exit the franchise relationship.

 

In my experience a franchisee exit may take a number of forms, some of which are as follows:

 

  1. The franchisor may re-acquire the franchise on terms that include one party is to pay compensation to the other party or neither party is to pay compensation.

 

  1. The franchisor may assist the franchisee to sell the franchise business.  The terms of the franchise agreement will, in nearly all cases, allow for the sale of the franchise business with the consent of the franchisor.  Strictly speaking, allowing the franchisee to sell the business as a means of exiting the business is not a settlement term and no more than the exercise by the franchisee of a contractual right.  The difference as an exit strategy is that the franchisee may seek, or the franchisor may offer special terms to a prospective purchaser to incentivise the purchase of the business.  This makes a sale of the business more attractive to prospective purchaser and facilitates the franchisee’s exit from the franchise relationship.  

 

  1. The secret sauce of mediation is that unlike Court proceedings which determine matters in dispute between the parties, mediation allows the parties to put something on the table that is attractive to the other party and allows for a flexibility in outcomes that can never be achieved from Court proceedings.

 

  1. The termination of the franchise agreement and the closure of the franchise business is another exit strategy. The termination by consent of the franchise agreement may be on terms that allow the franchisee to continue to operate the business as an independent business and not as a franchise business.  This solution usually requires the franchisor to release the franchisee from any restraints of trade and confidential information obligations and requires the franchisee to cease using the brand and intellectual property of the franchisor.  

 

  1. There are other ways to consensually exit a franchise agreement by terms of settlement which may include components of all or some of the above outcomes.

 

  • Why do franchisees/franchisors need an exit strategy at all?

 

There are other ways to end a franchise agreement.  For example, the franchisor may terminate the franchise agreement for breach.  If a franchisee is in breach of the franchise agreement, the franchisor may serve on the franchisee a notice to remedy the breach.  If the breach is not remedied, then the franchisor may terminate the franchise agreement.  If there is a premises involved and the franchisor holds the lease or sublease or there is a premises licence agreement, the franchisor may exercise its rights under the lease, sublease, or premises licence agreement to exclude or lockout the franchisee from the business premises from which the franchise business is operated.  This effectively either ends the franchise business or ends the franchisee’s involvement and interest in the franchise business.

 

Abandonment is another means of exit which occurs when the franchisee ceases operating the franchise business and stops complying with its obligations under a franchise agreement or lease, sublease, or licence agreement.  This is an unsatisfactory way to achieve an end to the franchise relationship.  Abandonment of the franchise and any lease, sublease or licence arrangement concerning the business premises before the end of the term of the franchise agreement, lease, sublease, or license agreement will be a breach of an essential term or terms of those contracts.  

 

This will expose the franchisee to a legal action for damages including the franchisor’s lost future franchise fees and/or the landlord’s lost future rent.  These damages may be substantial.

 

  • For those needing a franchise exit strategy what should they do?

 

If you are a franchisee who wishes to exit a franchise agreement, or a franchisor who wants a franchisee to exit, it is important to seek legal advice and work with your legal advisors to implement an exit strategy that avoids the legal risks associated with termination for breach or abandonment of the franchise agreement.

 

Before meeting with your legal advisors you need to be clear in your own mind what is your preferred best outcome but also consider what other outcomes you may be willing to accept to resolve the dispute that has led you to wish to exit the franchise.

 

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