Franchise disputes can be complex and expensive to resolve. In most circumstances a franchise dispute can be resolved by speaking to the franchisor directly. Unfortunately, there are also occasions where a resolution cannot be found. In this scenario, you may decide to see it if is possible to exit the franchise agreement.
In this guide, we will set out, step by step, some of the common causes and considerations involved in franchise disputes and whether it’s possible to exit a franchise agreement.
We will cover:
What are the common causes of franchise disputes?
We’ve identified some of the most common causes of disputes that our dispute lawyers have come across when dealing with franchise disputes. These include (but are not limited to) 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 the franchisee a form of exclusivity to operate a franchise of the franchisor’s network in a territory specified in the agreement). However, having territorial exclusivity rights in a franchise agreement does not preclude problems from arising and it’s important to highlight that the franchisor may at some point seek to make changes to the franchisee’s territory exclusivity. A dispute might therefore arise because:
- The franchise is underperforming: This might lead the franchisor to look into its rights to sell to another franchise 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 franchise to open within the exclusive area, for example, if there is a significant increase in customers in the geographical area.
- 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 in relation to each individual 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 a franchisee pays to the franchisor can be meant to be 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 the part of the franchisee. Disputes can arise when there is miscommunication about the franchisee’s expectations as 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 a franchisee taking action against them.
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 (formally known as ‘rescinding’) the franchise agreement if it can be proven that there has been a misrepresentation of an existing material fact and that this misrepresentation caused the franchisee to enter into the agreement because they 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
Trademarks are a valuable asset to any franchise and although a franchisee can reap the benefits of using a trademark without having to concern themselves about the legal intricacies and procedures that go into this side of the operation, the flipside of this is that use of the trademark is generally tightly controlled and permission to make any alterations to it must be sought from the franchisor in the first instance. Similarly, a company’s trademark will only be useable in such a way as is set out in the franchise agreement and any misuse by the franchisee will invariably result in a problem, which could include the franchisor seeking a court order to stop the franchisee from misusing the trademark.
Issues with franchise payment affordability
Some franchisees may find themselves in the position where they are 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 and in any event, it can lead to the risk of the franchisee being in breach of the contractual parameters of the franchise agreement if they are struggling to make these regular payments. Franchisees may then find themselves at the receiving end of a threat of legal action if the parties cannot reach a resolution.
Breach of post-termination restrictions
Another way in which a franchisee might find themselves embroiled in a dispute even after a franchise agreement has ended is if there is a breach of any post-termination restrictions. The former franchisee could be deemed a rival business if they go on to set up on their own, for example – something which may well be in breach of such restrictions – so it’s crucial that legal advice is sought to try and minimise the chances of a situation of this nature arising. This is another area in which the franchisor may seek a court order to compel the former franchisee to abide by the post-termination restrictions to protect the franchisor’s business model.
Terminating franchise agreements
Although possible, it can be difficult to terminate a franchise agreement without liability for breach. Typically, franchisors do not include early termination clauses in franchise agreements, doing so would harm the security of their business model.
Franchisors are often established businesses and in most circumstances they will have the funds needed to defend or bring litigation claims. As a result, litigation can quickly become expensive and very risky for the franchisee. Our dispute solicitors can review your evidence before you commit considerable resources to litigation. Often the best approach is to negotiate an exit with a franchisor to allow both parties to move on.
Can I exit my franchise agreement?
If you are a franchisee then it’s important to know what your options are when it comes to exiting a franchise agreement. However, this is determinable 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. However, it is 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 specialised dispute lawyer can potentially negotiate an exit on your behalf if the circumstances lend themselves to doing so.
Franchising disputes require expert handling by lawyers who are well-versed in navigating the nuances of this particular type of contractual dispute to ensure the best outcome for you. As this article illustrates, there are multiple factors that can give rise to conflicts involving franchises, so whether you are a franchisor or franchisee, our specialist team of solicitors has the knowledge and experience to help you avoid – or to deal with – some of the common challenges with franchise disputes outlined above.
With advice and guidance from our team, you will be much better placed to understand the strengths and weaknesses of your position and how this can influence the prospects for a commercial resolution. This could involve negotiating terms for a complete exit or a revision of the terms of the franchise and/or compensation where one party to the franchise has failed to deliver on their obligations or to recognise a change in the economic realities of the franchised service or product.