What to do when a franchise agreement goes wrong

Depressed businesswoman

Businesswoman holding her head in her hands

Franchises provide a tried and tested business model for those who want to strike out on their own, but don’t want to take the most common risks associated with entrepreneurship. But what if things don’t go well between a franchisee and franchisor. What can you do?

Clive Rich, chairman of LawBite, provides information for both franchisees and franchisors on how to get out of a contract if things don’t go to plan.

Franchisees: how to terminate a contract

Given that the term of a franchise is fixed, if you are a franchisee and you want to be able to terminate the franchise agreement you have to be able to find legal grounds to do so.

If you are the franchisee, your rights to terminate are likely to be restricted. It may be that the franchisor has failed to perform its material obligations under the agreement (eg providing you with a manual or agreed training support or not honouring an exclusivity clause). However, there may be a required cure period of say 30 days before you can terminate for such breaches. Or you may find that the franchisor has excluded rights in the contract to terminate for the franchisor’s breach.

If this happens you may need to rely on some other non-contractual remedy (eg the franchisor having made misrepresentations to you as to what you could earn from the deal in the lead-up to the agreement). However, you may be stumped here as well because many franchise agreements will seek to include a clause which prevents you relying on any representations, warranties or promises made to you during the course of the discussions which caused you to take the franchise. So if any such promises or representations were made make sure they are included as specific clauses in the agreement so that you can rely on them.

Franchisors: how to terminate a contract

Here are some typical instances in which a franchise agreement would give the franchisor the chance to terminate the franchise agreement:

  • the franchisee is in default of payments due under the agreement;
  • the franchisee commits a material breach of any term of the agreement and doesn’t remedy that breach within a certain cure period (say, 14 days)
  • the franchisee’s employees don’t fully carry out the training you require them to undergo
  • the franchisee hasn’t started trading by a certain date
  • the franchisee provides any false or misleading information
  • persistent or valid complaints continue to be made to the franchisor about the quality of the service provided by the franchisee and the franchisee fails to improve the service
  • the franchisee does anything to invalidate your trademark or oppose it
  • the franchisee gets into financial trouble including not being able to pay its debts when they fall due, re-arranges its debts with creditors, enters into liquidation or a winding up, enters into administration
  • the franchisee stops doing business or there is a change of control in its business.

*Clive Rich is CEO and Chairman of LawBite, an online legal service providing Simple Law for Small companies. He is also a legal expert on Workingmums.co.uk’s site. LawBite is headline sponsor of Workingmums.co.uk’s first Top Franchise Awards in May. The Awards are open for nominations until 4th March. For more information, click here.



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