Franchise Q&A
Most franchise agreements will
provide the franchisor with a right to terminate immediately when, for instance, a franchisee has misused the brand, been involved in a competing business, committed certain criminal offences, abandoned the business or become insolvent.
In other cases, the franchisee will be
[Bio] Gurmeet Jakhu is a partner at Nelsons Solicitors
provided with an opportunity to remedy the breach over a certain period of time (five to 28 days depending on the nature of the term being breached) before a franchisor is entitled to terminate. The courts have decided that in
order for a franchisor to terminate for material breach, the franchisee must have committed a serious transgression, often referred to as a repudiatory breach. It is important for a franchisor to comply with the procedures, ensuring that the breach is in fact capable of being remedied before terminating due to failure by the franchisee to remedy. Whilst franchise agreements do not
Q: Why does the franchise agreement only allow the franchisor to terminate?
A: In most cases, a franchisor will either own or have the right to use the trademarks and other intellectual property rights (IPRs) associated with the brand. Trademarks are often described as the ‘lifeblood’ of franchising. The franchisor is the guardian of the IPRs and must be able to act swiftly where there is a threat of damage to the brand. If such behaviour goes unchecked, it could have an adverse effect on the reputation of the business and may lead to its demise.
provide a franchisee with an express contractual right to terminate, they can instead rely on common law, provided the franchisor has itself committed a repudiatory breach. Where a franchisor is in repudiatory breach, the franchisee will argue that it is no longer bound by any provisions in the franchise agreement that apply on termination (for example, the post-termination restrictive covenants). This is seriously bad news for a franchisor! Be very careful before terminating a franchise agreement relying on common law rights, however, because an incorrect termination could expose you to a claim in damages for wrongful termination.
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Businessfranchise.com | December/January 2015
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