Our franchise litigation solicitors comment on the rights of franchisees in situations where they believe their franchisor has breached the franchise agreement.
Franchise disputes are far from uncommon and have recently been making headlines: the pizza chain, Dominos’, ongoing dispute in the UK with its franchisees over profit sharing, which in turn is affecting its ability to expand into other European territories, or even when hundreds of KFC branches ran out of chicken in 2018 resulting in a substantial loss of earnings for both the franchisor and its franchisees. Whether you are a franchisee or franchisor of a small national or large international business, it is important you know what your rights are in order to protect you/your business from any potential claim(s) that could follow. As there is no legislation in the UK that specifically regulates franchising (although there is a self-regulating body – the British Franchise Association), it is crucial that you understand the provisions set out in the Franchise Agreement and in the event of a dispute, approach experienced franchise litigation solicitors, as these types of claims can often become complicated and involve different areas of law, such as: intellectual property, contract, and insolvency.
The Franchise Agreement
The Franchise Agreement will govern the relationship between the parties. It will dictate the parties’ obligations to one another, and in most cases, is weighted heavily in favour of the franchisor. The Franchise Agreement will often stipulate the terms or process to be followed in the event of a dispute, such as mediation or arbitration. However, we understand that parties cannot always reach a settlement through Alternative Dispute Resolution (“ADR”) and you may therefore have no choice but to consider litigation.
In the event of a breach, what remedies are available?
Within contracts, terms can be classified as a condition, warranty, or innominate term. It is important to know the distinction between each as it will affect the remedy available to the non-defaulting party (i.e. the innocent party) for breach of contract. So, what do these terms mean? A condition goes to the “root” of the contract. If breached, then it gives the non-defaulting party the right to either affirm the contract (continue the relationship under the contract) or terminate the contract by way of a repudiatory breach. A repudiatory breach is a breach in a contractual relationship that is so serious, that it would entitle the non-defaulting party to the agreement to terminate it and that party would then be released from the terms of the contract. However, it is crucial that you are certain of your position, as there are associated risks if you get it wrong. A warranty on the other hand only entitles the non-defaulting party to claim damages, not to terminate the contract. An innominate term is somewhere in the middle. The non-defaulting party can terminate the agreement if a breach of that term is “sufficiently serious.” The test that is often applied is from the case of Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd and is whether the non-defaulting party is deprived of “substantially the whole benefit which it was the intention of the parties as expressed in the contract that it should obtain.” The remedies available will depend on whether it is held the breach substantially deprived the non-defaulting party of the whole benefit of the contract or not. If it is, then the remedy available would entitle that party to terminate or affirm the contract and claim damages. However, if not, then the remedy available would be for damages only.
If you consider there has been a breach of the Franchise Agreement, can you terminate? Yes, firstly depending on what clause(s) has been breached and whether it is deemed to be a condition or innominate term. Secondly, the Franchise Agreement itself will normally have a detailed provision dealing with termination and what the parties are required to do, such as providing notice within a stipulated time frame and in a specific format for example. If there is a mistake in the way this is done then the party in breach could avoid liability on the basis of a technicality, so it is key that you obtain legal advice before considering terminating your Franchise Agreement. Thirdly, you should also seek advice on your rights and obligations in the event a franchisee has given a personal guarantee.
What should you do in the event your business is failing or you cannot reach a resolution amongst yourselves? As each individual case will depend on the facts, you should try and seek legal advice immediately to avoid causing any further detriment to your business or prejudicing your position. At Eldwick Law, our specialist solicitors can assist you whether in ADR or from the pre-action stage through to the conclusion at trial.