Why Does A Franchise Agreement Only Allow The Franchisor To Terminate?

In most cases, a franchisor will either own or have the right to use the trade marks and other intellectual property rights (IPRs) associated with the brand.

Trade marks 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 will have an adverse effect on the reputation of the business and may lead to its demise.

Most franchise agreements will provide the franchisor with a right to terminate immediately when for instance the franchisee has misused the brand, is involved in a competing business, committed certain criminal offences, abandoned the business, or becomes insolvent. In other cases, the franchisee will be provided with an opportunity to remedy the breach over a certain period of time (e.g. five or 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 breach, often referred to as a repudiatory breach. It is important for a franchisor to comply with the procedures before terminating and to ensure that the breach is in fact capable of being remedied, where it is relying on a failure by a franchisee to cure a remedial breach.

Whilst franchise agreements do not provide a franchisee with an express contractual right to terminate, they can instead rely on the common law, provided the franchisor has 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 which apply on termination, for example, the post-termination restrictive covenants. This is seriously bad news for a franchisor!

However, you should be very careful before terminating a franchise agreement relying on common law rights, because an incorrect termination could expose you to a claim in damages for wrongful termination.

Franchise Agreement Terminate

How can we help?

Serena Louca is a Trainee Solicitor at Nelsons.

If you have any questions concerning the subjects discussed in this article, please contact Serena or a member of our expert Dispute Resolution team in Derby, Leicester, or Nottingham on 0800 024 1976 or via our online enquiry form.

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