Franchise disputes

We tell you how to run the dispute in the most effective way

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Franchise disputes

A franchise dispute challenges the basis of a relationship between the franchisor and its franchisee. Often franchisees request our support when they cease to believe they are obtaining commercial value from the franchisor. The franchisor can believe that the brand is being diluted. We can act for either side, and resolve disputes in a time and cost efficient manner.

Strategy for resolving the franchise disputes

Our experience and sector knowledge enables you to:

  • Evaluate the breach of a franchise agreement;
  • Consider the options on breach of a franchising agreement;
  • Determine whether the agreement has to be terminated or if the relationship can subsist;
  • Consider the availability of alternative methods of dispute resolution (ADR), including mediation; and
  • Take court action if that is the only solution.

Negotiating a settlement of the dispute

A franchising model can be extremely beneficial and valuable to both parties. Often, a franchising agreement can subsist for years without dispute. However, when a dispute arises, it is important to maintain an approach consistent with the relationship between the parties.

Entitled to terminate to procure settlement

It may be that the other party’s breach entitles you to repudiate the franchising agreement and claim damages accordingly. Although this may be the legal position, it may not be the most appropriate commercial decision.

Mediation: usually best method to resolve franchise disputes

Where appropriate, we advise parties to mediate their differences. A mediator is an independent third party, often an expert in the sector, who seeks to resolve the parties’ differences and facilitate settlement.

Mediation preserves business relationships

A mediator can help the parties to reach an appropriate settlement to preserve the business relationship. If you are in a dispute, but wish to remain in the agreement or maintain an amicable relationship, then we are able to help.

Mediation is surprisingly successful.

Taking appropriate court action

In some circumstances, a franchising agreement fall out leads to court action. It is important to understand the terms of a franchising agreement to consider the remedies available. Typically, there are three types of terms within a franchising agreement:

  1. Conditions: these are terms that are fundamental to the operation of the franchising model, such as terms relating to royalties, premiums, confidential information or know-how.
  2. Warranties: these are terms that are not fundamental to the operation of the franchising model. Inevitably, they are few and far between. An example may be a minor assurance as to a party’s market power.
  3. Innominate terms: these are terms that cannot be classified as conditions or warranties. If the effect of the breach of the term substantially deprives the non-defaulting party of the whole of the benefit of the agreement then it will be treated as a condition. If not, it is a warranty.

The effect of the agreement’s terms

With conditions and innominate terms depriving the non-defaulting party of the whole benefit of the agreement, the franchising agreement can be terminated and damages claimed. A breach of warranty only entitles the non-defaulting party to damages. We review franchising agreements to formulate a case plan. A breach of royalty payments may entitle rescission, whereas breach of a minor statement as to financial security may not. However, if the statement is relied on by a party entering into the franchise agreement, misrepresentation may be an open cause of action.

Assessment of damages

Either a franchisor or franchisee may seek damages and/or repudiation of the franchising agreement. Below is our list of some of the commercial considerations to be taken into account upon a party’s breach of a franchising agreement:

  • Whether repudiation is to benefit future trade;
  • Whether the dispute is likely to receive negative press coverage, damaging goodwill;
  • Whether an interim injunction pending trial is necessary to prevent continued breach;
  • What will happen to the intellectual property rights on termination;
  • Whether either party is to be bound by post termination restrictions; and
  • Whether information needs to be protected to prevent public domain publication.

Group action in a franchise dispute

A franchisor may choose to operate on boilerplate franchising agreements. Where this is the case, a franchisor may be in breach of a single term of the franchising agreement, but to a number of franchisees – resulting in numerous applications against the franchisor for breach of the franchising agreement.

Collective action against the franchisor

We have taken collective group action on behalf of franchisees. Conversely, we are able to formulate reasoned defences on behalf of franchisors subject to group litigation claims. With this in mind, it is imperative that a franchising agreement’s terms are reasonable, enforceable, and commercially viable for parties to abide by.

You will be in a much stronger position to negotiate the terms of the franchising agreement where you consider the likelihood of future disputes – don’t leave it to the point of a dispute to claim invalidity.

Enforcing and advising on post termination restrictions

A commercially astute franchisor will always seek to impose restrictive covenants on its franchisee once the agreement has been terminated. Such restrictive covenants may limit the geography, scope and duration of a franchisee’s trade once the agreement has been terminated. Unfortunately for franchisees, the courts do not rectify a commercially bad bargain – with this in mind, agreements have to be strictly negotiated.

Enforcing restrictive covenants

Broadly, for a restrictive covenant to be enforceable it must protect the goodwill of the franchisor. Most franchisors have established goodwill, but not within the geography or scope of its franchisees’ future trade. These points need to be raised to prevent the future business objectives of franchisees being stifled. Our experience in extracting franchisees from franchise agreements enables us to formulate creative solutions.

We negotiate covenants on behalf of franchisees and offer incentives to franchisors to waive restrictive covenants.

Competition considerations

Recently, competition laws have affected the use of restrictive covenants on termination of franchise agreements. Restrictions will be enforceable where they protect legitimate interests. An example may be the protection of confidential information from a franchisor’s competitors. We work with your instructions and formulate arguments to meet your objectives.

Our track record in resolving franchise dispute cases

We apply our expert knowledge on the law of franchising across a range of franchises. We have the experience to act for franchisees and franchisors. We focus on practical resolution of the franchise dispute – very few of our cases reach court as we usually manage to find a settlement.

  • Advised a major franchisor on the defence of multiple claims relating to the formulation of damages for early termination. Our accounting expertise enabled us to forensically and critically examine the loss claimed by the claimants.
  • Acted for a small coffee franchisee company where the franchisor set-up a business within the geographical proximity of our client’s business, damaging our client’s consumer base. We successfully applied for an interim prohibitory injunction.
  • Prepared and ran mediation on behalf of a franchisor seeking to terminate a franchise agreement early. The franchisor sought to impose restrictive covenants on the franchisee’s use of the franchisor’s trade secrets and confidential information.
  • Successfully claimed misrepresentation, on behalf of our client, an electrical software supplier. Our client entered the franchising agreement relying on the franchisor’s statements during the disclosure process.

A franchising model can benefit both the franchisor and the franchisee. The franchisor expands its market. The franchisee launches using existing goodwill to generate revenue. Relationships often breakdown. We step in to resolve franchising disputes, protect positions, and minimise business disruption.