The distinguishing characteristics of the System include a unique, specially developed concept which provides the services and products set forth above; a specially designed method for offering and marketing such services and products by the Franchisee to the customer; operating, instructional, and teaching procedures; methods and techniques for financial controls, record keeping, accounting and reporting, sales and sales promotion, marketing, and advertising; and the proprietary know how developed by the Company, and any part of which System, services and products may be further developed, improved, changed, and modified by the Company from time to time.[28]
One premise of a franchise agreement, often unstated, is that the franchisor will provide a valuable and tested business system tied to a trademark and trade name.[29] In exchange, the franchisee will pay substantial sums and make a large investment of time, labor, and resources. If the system is an untested hodgepodge or, even worse, a problematic failure, the franchisee is not receiving the basic benefit of the bargain.
Most franchise agreements define the franchise system provided to the franchisee, typically by labeling the brand's business methodologies, manuals, and the way of doing business under the franchisor trade name and marks. But the contract usually does not specify the details of the system and what actually is provided. The franchisor often makes no direct promise to provide the franchise system or much of anything else. Without fail, other provisions authorize the franchisor to change the system, often at will or under its sole discretion. Franchisors invariably assert that the franchise system must be fiexible to meet changing market conditions.[30]
Franchisees reasonably may ask several questions. What if anything regarding a franchise system will my franchisor have to provide me? Will my franchisor have a duty of competency regarding the franchise system performance it renders to me? Will my franchisor be able to change the franchise system even if it adds to my costs or otherwise harms my business?
Under current case law, a franchisor's obligation by virtue of its general preamble references to a franchise system is often unclear. Franchisees may argue that express obligations arise from such preambles or that the covenant of good faith and fair dealing imposes a franchisor duty.[31] One opinion in Canada found the franchisor had an express obligation under its agreement:
[Dunkin' Donuts] has assigned to itself the principal obligation of protecting and enhancing its brand. It failed to do so, thereby breaching the most important obligation it had assumed in its contracts. It must accept the consequences of such a failure. As noted above, franchisees cannot succeed where the system has failed. After sustaining several years of stagnant sales, narrowing sales, narrowing profit margins and then losses, the franchisees have had to close their stores.
Brand protection is an ongoing, continuing and 'successive' obligation.[32]
Case law regarding franchisor system changes often affirms such changes when they are authorized by the franchise agreement.[33] Thus, courts have upheld changes requiring a new reservation system[34] or higher amounts of meat in hamburgers[35] as properly contemplated in the contract language. In a hotel franchise system, however, a court held that, although a franchisor had retained the right to change the system, it breached the contract by imposing a fee on its franchisees not authorized in the franchise agreement as part of a new customer rewards program.[36] For the most part, however, franchise cases have not addressed a franchisor duty of competency in the performance of obligations regarding the franchise system.
Franchisees may seek to protect their reasonable expectations by modifying the franchisor-drafted "system"provision, via the insertions in italics:
The distinguishing characteristics of the System, which Company agrees to use best efforts to perform, include a unique, specially developed concept which provides the services and products set forth above; a specially designed method for offering and marketing such services and products by the Franchisee to the customer; operating, instructional, and teaching procedures; methods and techniques for financial controls, record keeping, accounting and reporting, sales and sales promotion, marketing, and advertising; and the proprietary know how developed by the Company. Any part of which System, services, and products may in good faith be further developed, improved, changed, and modified by the Company from time to time. However, any such changes may not materially alter the economic and other terms of this agreement unless consented to in writing by franchisee.
The revised wording not only confirms an express duty on the franchisor to provide the franchise system, but to perform using best efforts.[37] The revision also limits the franchisor's right