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
This situation is leading to an increased number of disputes
that need to be resolved.
Franchise Agreements can generally be terminated in the
If a party breaches or repudiates the agreement;
If the franchise agreement was entered into as a result of
misrepresentation or other serious misconduct;
If the contract is frustrated or illegal based on some
fundamental mistakes, or
If the Franchise agreement is unfair, unconscionable or
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
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
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
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.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
We discuss whether certain clauses commonly found in ordinary commercial contracts could be considered to be penalties.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).