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4 remedies to franchise disputes

Dec 19, 2022 | Uncategorised

Franchise agreements are like employment contracts – we sign them in the hope that we’ll never have to look at them again.

However, in the event of a dispute, your agreement becomes a key piece of evidence.

A common cause of disputes arises when one party blames the other for the business underperforming or going under entirely. Perhaps the franchisee didn’t stick to the contract and in doing so damaged the franchisor’s brand. Or perhaps the franchisor didn’t provide the support it promised in the agreement – and which the franchisee is paying for.

Disputes can also arise in relation to restrictive covenants – if, for example, an ex-franchisee sets up a new business in competition with their old boss.

Other causes of conflict include:

  • The franchisor having misled the franchisee as to the expected ROI on entering the agreement.
  • Changes to the franchisee’s territorial exclusivity rights (in other words, the right given to the franchisee to have sole operational rights in a particular area).
  • A franchisee being dissatisfied with the way the sum they pay towards the franchise’s overall marketing and advertising is being used.
  • Misuse of trademarks. For a franchisee, the chance to trade on an existing trademark is part of the allure of entering a franchise agreement. Any misuse, however, is likely to cause conflict.
  • A franchisee being unable to pay the ongoing franchise fees.

In this article, we run through four remedies available to you if you find yourself locked in a franchise dispute.

1. Alternative dispute resolution (ADR)

ADR isn’t unique to the world of franchising – it refers to any attempt to resolve a dispute without resorting to legal action. The turbulence, expense and public nature of court proceedings are such that many people try to seek an alternative remedy.

ADR is a process that takes place behind closed doors. The parties pick a mediator or arbitrator – this will be a legal expert with knowledge both of the franchising sector and dispute resolution.

The basic difference between mediation and arbitration is that a mediator tries to find a middle ground between the two parties. The arbitrator is more like a traditional judge who listens to the two parties and decides in favour of one of them.

If an agreement can’t be reached through ADR, franchise disputes can be taken to court.

2. Damages

If one party believes they suffered financial loss because of the other, they can seek financial compensation in the form of damages. This covers financial loss but not other types of injury such as psychological distress.

The claimant has to prove that the reason for their financial loss was the other party’s breach of the agreement. The amount of compensation is then decided by the judge.

These types of damages are sometimes known as “unliquidated”.

Liquidated damages, by contrast, are where the two parties set an amount that will be paid in compensation in the event of a breach. It’s a little like a prenup in marriage law – preparing for the worst while hoping for the best.

Having a liquidated damages clause in the franchise agreement can take some of the heat out of a franchise dispute. The injured party is simply seeking what’s due – not having to justify the amount of compensation they’re claiming based on an unforeseen circumstance.

3. Equitable remedy

In some cases, a judge will rule that financial compensation isn’t an appropriate remedy.

Consider the case of Senior Care at Home Ltd vs Adult Home Care Ltd. Senior Care, the franchisor, believed that Adult Home Care was in breach of its agreement and terminated the contract. Adult Home Care sought damages. The judge decided that in this instance, damages would give a green light to other franchisees to break their agreements.

An alternative to damages, then, is an “equitable remedy”. This is when the court orders one of the parties to do or not do something rather than pay an amount in damages.

There’s also the option of “rescission” – an antique word that derives from “to rescind” and which dates back to the days of Henry VIII. This annuls the contract and returns the parties to their pre-contractual state. This could happen if, for example, the franchisor misrepresented the financial performance of the franchise before the agreement was signed.

4. Termination

Franchise agreements can be terminated in the case of a serious breach. As with liquidated damages, the termination clauses are contractual precautions that set out what the franchisor’s rights are in the event of a breach of contract.

The agreement should set out what will happen if the relationship is severed and how the franchisor’s reputation will be protected. It also defines their intellectual property rights – typically prohibiting the ex-franchisee from using trade secrets to compete with the franchise.

The franchisor is only very rarely able to terminate the contract straight away. They have to give the franchisee a chance to remedy the situation.

If grounds for termination aren’t included in the agreement, something known as “repudiatory breach” comes into play. This is where the terminating party gives the other party a choice: either affirm the contract or end it.

Repudiatory breaches are the nuclear option in response to a serious breach that goes right to the heart of the contract. Pressing the button requires thought, planning and advice – because, if it goes wrong, the terminating party could find themselves committing a breach of contract and end up paying damages to the franchisee.

Termination can be a fraught affair because both parties have different interests to protect. The franchisor’s priority will be safeguarding its assets and reputation. The franchisee, on the other hand, will want to emerge from the dispute with minimal damage done to its operations.

Court action is something to be avoided if you can. But should ADR fail, there are legal remedies available to you in the event of a franchise dispute.

Are you looking for legal advice for franchise disputes? At Milners, we have a team of expert contract lawyers who can help you make your claim. Contact us for a free, no-obligation consultation.

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