Franchise disputes are caused by many things provided a disagreement exists between the two main players within a franchise–franchisors and franchisees. One major cause of franchise disputes involves contract termination or ending a franchise agreement.
Both the franchisor and franchisee can end their contractual relationship with the other party under certain circumstances, particularly if the wrong or default in question involves integrity issues. However, some wrongs, such as an unbalanced franchise agreement can be resolved by involving a franchise agreement review by an attorney. But what are the different types of terminations?
Common Types of Franchising Terminations
A franchisor can terminate a franchise agreement when certain conditions stated in the contract arise, according to the franchise code, or in special cases. In other words, a franchisor can terminate a franchise agreement when:
- A franchisee violates the terms or breaches the terms of a franchise contract;
- Under special circumstances even if the franchisee hasn’t breached the contract;
- The conditions specified in the Franchising Code are fulfilled or triggered.
1. Termination for Contract Breach
Franchisors are advised to correct franchisees by making them aware of their mistakes and then giving them space for remedial–it could be an adjustment issue, particularly if the franchisee is green or inexperienced.
However, the franchisor can take other measures if no change is forthcoming, meaning the franchisee might be doing the mistakes arrogantly and intentionally. The following three prerequisites must exist before the franchisor terminates a franchise agreement:
- The franchisee was issued a valid breach notice;
- The franchisee was allowed sufficient time to remedy a breach; and
- The breach hasn’t been remedied within the timeframe of the breach notice.
The allowable remedial period is given to the franchisee at the discretion of the franchisor and not necessarily 30 days– according to the Franchising Code. However, you should refer to the franchise contract if the remedial period for a breach is less than 30 days in your case.
If you have received a franchise breach notice which provides that you must remedy the breach in a period that is less than 30 days, you should first check the provisions of your franchise agreement to see what the specified period under the franchise agreement is.
The remedial period is subject to review if the remedial period specified in the franchise agreement is less than 30 days, or the provision of the agreement does not include the phrase “the remedial period doesn’t have to be more than 30 days”–and the Breach Notice complies with the provision of the franchise agreement. The factors to consider when determining if the remedial period is reasonable or sufficient can include:
- Nature of the breach;
- Existence of prior breach notices;
- If a breach is related to the payment of financial remittances that were not submitted and the franchisee had sufficient time to submit the monies.
2. Termination in Absence of a Contract Breach
A franchise agreement can be terminated when certain circumstances occur, including:
- When the franchisee fails to fulfill their end of the bargain like submitting important documents;
- When the franchisee fails to meet a certain requirement, such as undergoing training;
- When the franchisee proves to be incompetent in managing the new outlet to the satisfaction of the franchisor;
- When the franchisee’s performance falls below par for a long time.
3. Termination under Special Circumstances
The franchising code sets out or specifies the “special circumstances” that can trigger the termination of a franchise agreement, including:
- The franchisee doesn’t have the license required to operate the franchised business;
- When the franchisor or franchisee becomes bankrupt or insolvent;
- If the business is deregistered;
- If the franchisee engages in fraudulent dealings;
- When the franchisee is no longer committed to the franchise;
- When the franchisee is facing a serious crime, such as money laundering, murder, and more; or
- When the actions of the franchisee endanger the health or safety of others;
When can the Franchisee Terminate the Contract?
Most franchise agreements specify the conditions that can trigger a franchisee termination, including:
- When the franchisor breaches the terms of the contract;
- When a franchisee transfers their rights to a third party; the franchise agreement is potentially terminated and a new one must be drafted;
- When misrepresentation of facts by the franchisor is established;
- When the franchisor acts in bad faith;
- When the active term expires and the franchisee is no longer interested in the business.
Are All Termination Notices Valid?
A termination notice must comply with the Franchising Code of Conduct and the franchise agreement/ contract. Otherwise, the termination notice is invalid and the franchisee can file legal action against the franchisor for punitive damages.
Working with a competent franchise attorney is recommended because they’ll advise you about the available legal options depending on the facts of your termination, plus you’ll be guaranteed a fair trial if the case goes to court.