Terminating Franchise Agreements
The close relationship between a Franchisor and Franchisee is perhaps unique in the commercial world.
As a result, unfortunately it is common for a Franchisor and Franchisee to fall out with each other, often about their obligations under the Franchise Agreement. When this happens it is important that the Franchisor takes advice as quickly as possible to ensure that they protect their position.Often a Franchisee will be late in paying monthly management fees, or other sums, to the Franchisor.
Sometimes the Franchisor is unhappy with the quality and/or delivery of the Franchisee’s service (usually the Franchisor will have received complaints from the Franchisee’s customers, or other members of the network). Occasionally the Franchisee simply doesn’t provide management information to the Franchisor as regularly as they should, leaving the Franchisor unable to manage that Franchisee’s performance within the network.
If a Franchisor deals with problems like this informally, specifically without having taken legal advice, they risk prejudicing their position. The Franchisor might not want the legal fees from dealing with a problem which is still a long way away from a Court room. However, in our experience, this can sometimes lead to Franchisors prejudicing their rights under the Franchise Agreement.
A skilful franchise solicitor will advise a Franchisor on managing the Franchisee at this early stage of the dispute. This could mean a Franchisor fixes the problem with the Franchisee and preserves a potentially profitable relationship. A franchise solicitor will also makes sure that the Franchisor’s position is protected if the relationship isn’t capable of being salvaged.
If the relationship gets worse, and the Franchisee is still acting in breach of the Franchise Agreement, the Franchisor may have to serve a default notice on the Franchisee.
Most Franchise Agreements require the Franchisor to put the Franchisee on notice of most types of breach of the Franchise Agreement. Most agreements also then give the Franchisee a period of time to fix the breach otherwise the Franchisor has the right to terminate the agreement. Again, this is a crucial time for the Franchisor to take advice as it is important to get the default notice right if the Franchisor is going to be able to rely on it to terminate the Franchise Agreement. Again, a skilful franchise lawyer will be able to draft the default notice in a way that protects the Franchisor’s position.
If the Franchisor wants to try to salvage the relationship with the Franchisee, the default notice can include scope for the parties to discuss a resolution to the dispute that avoids the Franchise Agreement being terminated. Some Franchise Agreements allow the Franchisor to suspend the Franchise Agreement whilst they investigate a potential breach. This suspension period can allow the parties to try to resolve the future of their relationship. A Franchisor can also insisting that the Franchisee meet with them to discuss the Franchisee’s business going forward as part of the default notice. Again, this can be a crucial part of bringing a Franchisee back into the network in a way that avoids having to terminate the Franchise Agreement.
Unfortunately, sometimes the Franchisor is left with no choice other than to terminate the Franchise Agreement. This can be because their attempts at salvaging the relationship with the Franchisee have been unsuccessful. It can also be in circumstances where a Franchisee acts so badly that they are in fundamental, or repudiatory breach, of the Franchise Agreement. Most Franchise Agreements also include a list of circumstances that allow the Franchisor to terminate the Franchise Agreement immediately (such as franchisee insolvency, for example).
Terminating the Franchise Agreement is the most critical phase of a franchise dispute. Again, it is important that the Franchisor takes advice on whether or not they have grounds to terminate the Franchise Agreement, as if they don’t and they go on and terminate the Franchise Agreement anyway, they risk a damages claim from the Franchisee for wrongful termination of the Franchise Agreement.
The Franchisor can then go on to bring court proceedings to recover any amounts that they are owed by the Franchisee. This is most usually divided into two categories:
- arrears that the Franchisee owes to the Franchisor under the Franchise Agreement
- damages for the early termination of the Franchise Agreement.
Damages under (2) are usually the profit that the Franchisor has lost from having to terminate the Franchise Agreement early. There are some relatively complex concepts here about mitigating loss and accelerated receipt, so again, a Franchisor is advised to take advice on what they can legitimately claim from the ex-Franchisee. A Franchisor may also need advice on enforcing the post-termination restrictions that are usually contained in a Franchise Agreement.
Navigating through any contract dispute is a tricky process to get right and a party to an agreement is always best advised to take strong, clear legal advice on their contractual position before they terminate an agreement. This is even more important in the case of the Franchisor/Franchisee relationship. The relationship between Franchisor and Franchisee can often be much closer and much more emotional than that between ordinary commercial contractors, making it more likely that Franchisors can become embroiled in lengthy and expensive disputes with upset Franchisees.
If you have any questions about this article, or if you have any issues with any Franchisees that you would like advice on, please contact any member of the Ashtons Legal franchise team. We have considerable experience of guiding clients through termination of a Franchise Agreement.
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