In the current economic climate, we are seeing more than ever before a number of breaches by Franchisees of their obligations under their Franchise Agreements. Unfortunately, it is a very difficult time for many businesses and a number of franchisees are finding themselves struggling financially and unable to meet their obligations.

This situation is leading to an increased number of disputes that need to be resolved.

Franchise Agreements can generally be terminated in the following circumstances:

  1. If a party breaches or repudiates the agreement;
  2. If the franchise agreement was entered into as a result of misrepresentation or other serious misconduct;
  3. If the contract is frustrated or illegal based on some fundamental mistakes, or
  4. If the Franchise agreement is unfair, unconscionable or unlawful.

Termination of a franchise however is a drastic remedy and can have serious consequences for both parties. It is important to consider other avenues either for resolving disputes or for dealing with, or penalising, inappropriate conduct and breaches rather than terminating the agreement.

The franchisors' obligations

Whilst Franchise Agreements often contain an extensive list of Franchisees' obligations to the Franchisor, the Franchisor's obligations to the franchisee are very limited. Generally speaking a franchisor has no obligation to assist a franchisee under the Franchising Code.

Many franchise agreements allow a franchisee to seek assistance from the franchisor should they feel it is required, or for a franchisor to determine that a franchisee needs extra assistance and to 'offer' it to the franchisee. However other than what is included under the Franchise Agreement, a franchisor is under no further obligation to assist its franchisee.

At common law, a franchisor has an obligation to act in good faith. This means that where a franchisor wishes to terminate an agreement for improper conduct, or more likely in the current climate, poor performance there must be evidence of that conduct. Any actions of the franchisor need to be seen as being proportionate to the conduct of the Franchisee and termination of the Franchise Agreement justified on commercial grounds.

It would be prudent for a franchisor to proceed with any default notices or terminations on the basis that it is under an obligation to deal with its franchisees in good faith. That means that a franchisor cannot just consider the express terms of a franchise agreement alone when deciding whether to take a particular course of action.

It is important for the parties to understand their obligations to each other and how those obligations affect their relationship. Understanding those obligations ensures that there is no confusion between the parties as to their responsibilities in respect of the franchise.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.