Franchise disputes can be complex and expensive to resolve but, a lot of the time, they can be settled by speaking to the franchisor directly. Unfortunately, there are occasions where a resolution can’t be found. In this scenario, as a franchisee, you may decide to see if it’s possible to exit the franchise agreement.
In this guide, our business dispute solicitors will set out, step by step, some of the common causes and considerations involved in franchise disputes, how to prevent them from arising, post-termination obligations and whether it’s possible to exit a franchise agreement.
Contents:
- What are the common causes of franchise disputes?
- What are the legal rights of franchisees in a dispute?
- Can I get my money back from a franchise?
- Can I exit my franchise agreement?
- When should I consider taking legal action against a franchisor?
- Terminating franchise agreements
- What are the most common post-termination obligations for franchisees?
- Summary
What are the common causes of franchise disputes?
We’ve identified some of the most common causes of disputes that our business dispute lawyers have encountered when dealing with franchise disputes. These include the following:
Changes to territorial exclusivity rights
It’s sometimes the case that a franchise agreement will contain operational rights within an exclusive territory (in other words, a clause that grants you as the franchisee a form of exclusivity to operate a franchise of the franchisor’s network in a territory specified in the agreement). Having territorial exclusivity rights in a franchise agreement doesn’t rule out the possibility of problems arising and it’s important to highlight that the franchisor may at some point seek to make changes to your territory exclusivity. A dispute might occur because:
- Your franchise is underperforming: This might lead the franchisor to look into its rights to sell to another franchisee in a previously exclusive territory, should training and support not result in improved performance levels.
- Demographical changes in the franchise territory: noteworthy changes within the exclusive territory could give rise to the franchisor seeking to divide up the territory or invite another franchisee to open within your exclusive area, for example, if there is a significant increase in the number of potential customers in the geographical location.
- Encroachment by a neighbouring franchisee in the same network: this can lead to disputes about which franchisee should be getting the business, requiring the franchisor to 'arbitrate' between neighbouring franchisees.
Marketing and advertising spend
A franchisor usually charges its franchisees a sum (calculated with various factors in mind about each franchisee) which is paid into a central advertising and marketing fund, and the total amount is then spent on advertising and marketing for the whole network. Whilst most franchisors will want control over advertising spending, a franchisee may become dissatisfied with the way the advertising budget is used, resulting in a potential dispute.
General lack of support from the franchisor
A perceived lack of support from a franchisor is a common issue that our dispute lawyers help with. Part of the ongoing fees that you’ll need to pay to the franchisor are often meant for the provision of support in the form of materials, coaching and advice, but it’s sometimes the case that this support is not forthcoming, leading to disgruntlement on your part. Disputes can arise when there’s miscommunication about your expectations balanced against exactly what level of support a franchisor ought to be providing and if the communication channels are not sufficiently open, this can lead to legal action.
Misrepresentation
Alleged misrepresentation can occur when an accusation is made against the franchisor that they made false or exaggerated claims about the financial performance of the franchise. Misrepresentation can provide a legal basis for cancelling the franchise agreement if it can be proven that there has been a misrepresentation of an existing material fact and that this misrepresentation caused you to enter into the agreement because you relied upon it. In addition to financial performance, other grounds upon which a franchisee may allege misrepresentation are around the success of other franchisors and the performance of a product key to the business.
Misuse of trademarks
Trade marks are a valuable asset to any franchise. Although you can reap the benefits of using a trade mark without having to concern yourself about the legal intricacies and procedures that go into this side of the operation, the flipside of this is that the use of the trade mark is generally tightly controlled and permission to make any alterations to it must first be sought from the franchisor. Similarly, a company’s trade mark will only be useable in such a way as is set out in the franchise agreement and any misuse by a franchisee will always result in a problem, which could include the franchisor seeking a court order to stop you from misusing the trade mark.
Issues with franchise payment affordability
Some franchisees may find themselves in a position where they’re unable to afford the ongoing franchise fees due to a lack of revenue being generated from the franchised product or service. This can lead to frustration directed at the franchisor if the reason is down to a perceived lack of support or misrepresentation.
What are the legal rights of franchisees in a dispute?
The legal rights of franchisees in a dispute will consist of those that are outlined in the franchise agreement itself, i.e. the contract, and will also be governed by more general contract and common law principles as well as specific legislation that protects against unfair terms in contracts, which includes franchise agreements. Broadly speaking, some of these rights include:
The right to be treated fairly
Any unfair or inequitable treatment at the hands of your franchisor can be subject to legal challenge as franchisors owe their franchisees a duty of good faith and fair dealing – this is what’s known in law as an implied term in your agreement.
The right to dispute resolution
This right is likely to be included within the terms of a well-drafted franchise agreement and may dictate that the parties engage in alternative dispute resolution (ADR) practices before any litigation can be started. In other words, there might be a term in the agreement that states that you and the franchisor have to attempt mediation or arbitration before going to court.
The right to compensation
As a franchisee, you’re likely to be entitled to compensation for any losses you suffer as a result of a franchisor’s unfair practices, breach of contract or misrepresentation.
The right to terminate the franchise agreement
Subject to certain (possibly limited) conditions, your agreement may give you the right to terminate it subject to notice being given to the franchisor.
Can I get my money back from a franchise?
It might be possible to get your money back from a franchise in certain circumstances, but it’s unlikely to be a quick or straightforward process. One of the main scenarios in which you could potentially do so would be if it came to light that the franchisor misrepresented a fundamental aspect of the franchise (for example, its earning potential). You may then have grounds to rescind the contract and be put back into the position you were in before signing the franchise agreement.
Another way in which you could be entitled to receive some of your financial outlay and your initial franchise fee back would be if the franchisor breaches the terms of your agreement, commits fraud, or there’s found to be duress or undue influence involved when you signed the agreement.
Can I exit my franchise agreement?
If you’re a franchisee, then it’s important to know what your options are when it comes to exiting a franchise agreement. This is determined on a case-by-case basis and it may not be straightforward on the face of it; whether you can legally exit the agreement will depend on various factors. It’s important not to cease trading or try to terminate the agreement without first taking advice – even when there is a perceived breach of contract or misrepresentation on the franchisor’s part.
A business dispute lawyer can potentially negotiate an exit on your behalf if the circumstances lend themselves to doing so.
When should I consider taking legal action against a franchisor?
There are certain situations as a franchisee in which it would be wise to consider taking legal action against a franchisor. These include:
- Where there has been a breach of contract
- If any unfair practices occur – for example, if there has been a misrepresentation, if the franchisor has committed fraud, or if they’ve done something that’s otherwise proven significantly detrimental to your business
- If the franchisor has shown an unwillingness to engage in attempts to resolve a dispute by an alternative means such as mediation
- If the franchisor tries to terminate their agreement with you without a valid reason.
If any of these scenarios apply to you, it’s recommended that you seek support from a lawyer with expertise in franchise disputes so that you can protect your interests as quickly as possible.
Terminating franchise agreements
It can be difficult to terminate a franchise agreement without liability for breach. Typically, franchisors don’t include early termination clauses in franchise agreements, because doing so would harm the security of their business model.
Franchisors are often established businesses with funds needed to defend or bring litigation claims. As a result, litigation can quickly become expensive and very risky for you as a franchisee. Our dispute solicitors can review your evidence before you commit considerable resources to litigation, but often the best approach is to negotiate an exit with the franchisor to allow you both to move on.
What are the most common post-termination obligations for franchisees?
There are several common post-termination obligations that franchisees need to adhere to. These are often part of the terms of the franchise agreement and generally include:
- Ongoing confidentiality requirements regarding the franchisor’s practices and any trade secrets
- Non-compete clauses, effective for a specified period of time
- The requirement to remove all franchise-associated branding and other identifying features from the business premises and marketing
- The return of any items that belong to the franchisor
- The settlement of all financial matters
As a franchisee, you should familiarise yourself with all of the post-termination obligations before the end of the agreement so that you have the right processes in place and are ready to act when the agreement comes to an end.
Summary
Franchising disputes require expert handling by lawyers who are well-versed in navigating this type of contractual dispute. There are multiple factors that can give rise to conflicts involving franchises, so whether you’re a franchisor or franchisee, our specialist team of solicitors have the knowledge and experience to help you deal with some of the common challenges associated with franchise disputes.
