The Franchise Agreement is the contract to which the franchisee is bound. It governs the relationship, supplies the terms, and acts to bind the franchisor and franchisee.
Breaking the Agreement
Franchise law is unique and different from other bodies of law. Therefore, terminating the Franchise Agreement is different than terminating a typical business contract. The Franchise Agreement is usually more one-sided (in favor of the franchisor) than a common business contract. Thus, the termination must be navigated with great care.
Who breached first? Franchisors consistently respond in a similar manner when communicating an intent to terminate the Franchise Agreement. The standard response by a franchisor is to state that the franchisee breached prior to the franchisor and that any breach that occurred by the franchisor was not material to the agreement. Why is this important?
What does a breach look like? A breach of contract occurs when one party to the contract has not honored one or more promises contained in the contract. The broken promise must be a material term of the contract to constitute a breach of contract. A “material” breach is “a substantial failure in performance” or a failure to perform a “primary purpose” of the contract. A breach is substantial if it prevents the contract from being completed or defeats the purpose of the contract. At this point, the non-breaching party is thus no longer obligated to finish their performance for the broken promise or agreement made under the contract.
Material Breach Factors: In determining if one party has materially breached the contract to the non-breaching party, the following are important factors to consider: (1) the extent to which the non-breaching party will be deprived of the expected contract benefits; (2) the extent to which the non-breaching party can be adequately compensated for the benefits he will be deprived due to the breach; (3) the extent to which the breaching party will suffer a loss if the contract is terminated; (4) the likelihood that the breaching party will cure his failure, taking into account all the surrounding circumstances; and (5) the extent to which the breaching party's behavior corresponds with standards of good faith and fair dealing.
What about Damages? Usually, the non-breaching party is entitled to damages after a breach of contract. If the breach is material, the non-breaching person may choose to affirm the contract and obtain a damage award to put him or her in the position he or she would have been in if the breach had not occurred, or the non-breaching person may choose to revoke the contract and be restored to the position he or she would have been in if the contract had never been made.
In the franchise world, the Franchise Agreement supplies the terms that govern in the event of a breach. Thus, it is critical to have a strong understanding of the Franchise Agreement so as to properly advise and navigate the termination.
Strategy & Plan of Action. As a franchise attorney, one of my first duties is to familiarize myself with the applicable Franchise Agreement. After careful review of the Agreement, the next step in the Termination is to carefully analyze the facts so as to ascertain when, or if, a breach by the franchisor occurred. As previously stated, the franchisor will attempt to show that the franchisee first breached the Agreement and that any breach that occurred by the franchisor was not material. It is my job to position the franchisee for success by bringing to light material breaches by the franchisor. After this is accomplished, I negotiate the exit.
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