Exiting a difficult franchise relationship

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Every disgruntled franchisee I have met has a different story to tell. Everyone’s situation is unique and in a brief article like this it is only possible to give generic advice. This generic advice is no substitute for advice which is tailored to your individual situation.

In most good franchise systems, the relationship and agreement works as it should. The franchisee derives a healthy return on their investment and the franchisor springboards from the success of their franchisees to expand and grow the brand.

Failed franchisees are not what any franchisor wants but franchises do fail and things do go wrong. When this occurs, it is commonly the franchisee who suffers the most because the rights of the parties fall back on what is in the agreement and franchise agreements offer very little protection for franchisees.

There are multiple reasons I have seen for the failure of franchises, including all or any of a combination of the following:

(i) franchisees failing to adequately learn the system and apply it;

(ii) lack of training of franchisees by franchisors;

(iii) lack of support and assistance by franchisors;

(iv) franchise model simply not fit for purpose, outdated or a dying fad;

(v) physical location of the franchise not suitable;

(vi) franchisee undertaking inadequate due diligence at the outset;

(vii) franchisee not a suitable person to operate the franchise;

(viii) franchisee expectations not met / misrepresentation (failure to comprehend the effect of the franchise agreement);

(ix) franchisees failing to take legal, accounting or business advice prior to their purchase of the franchise, or, where such advice is taken, failing to follow it; and

(x) poor franchisee performance.

A predominant reason lurking behind much franchise disgruntlement can be traced back to franchisees simply not fully researching their investment, relying too heavily on promises made by the franchisor or their agents and by not fully understanding the nature of what they have purchased, nor their legal position under the franchise agreement.

What to do when the franchise is not working?

One of the most common questions I get asked when I am asked to act for franchisees who have become bitterly disappointed in their investment is “how do I to get out of this franchise?”

There have been a number of cases that have gone before the High Court which are good examples of “how not to” try and extract yourself from the franchise relationship if you are franchisee who is disgruntled.[1] These are cases where franchisees attempted to terminate their franchise agreements without sufficient basis to do so. In most cases they most likely would have ended up losing their entire business as a result of getting that wrong.

Although franchise agreements typically do not contain any right of termination by a franchisee, franchisees do have their normal rights of cancellation under s 37 of the Contract and Commercial Law Act 2017. Those rights arise where there has been a substantial breach of the agreement or misrepresentation. The area is a very technical one and certain legal tests need to be met in order to be able to terminate an agreement. The ability to terminate is only a very limited one. Every situation is different and great care needs to be taken not to act with haste and to consider all relevant facts.

If the agreement can be successfully terminated then there is a good basis for arguing that the franchisee no longer has any obligation to perform their restraint of trade obligation.

Franchise agreements contain compulsory dispute resolution clauses for very good reason. It pays to consider resorting to alternative dispute resolution first before commencing litigation.

As this is a highly technical area requiring expert advice,  please seek legal advice  before taking any steps to terminate the franchise agreement.  The advice in this article is general advice only and is not a substitute  for advice on any one situation.

This article is not a substitute for legal advice about your own individual situation. Every case can be different so please seek legal advice or contact me direct for advice that applies to you.