Franchise contracts are legally binding and enforceable. A franchisor or franchisee can terminate a master franchise agreement for various reasons, such as breach of contract, underperformance, and more.
Establishing and operating a master franchise in U.S.A can be highly rewarding and lucrative. However, franchising comes with certain challenges that may require any of the parties to terminate the franchise agreement.
Franchise Contract Defined
A franchise contract is an agreement between a franchisor and franchisee. The franchisee pays a franchise fee to use the franchisor's intellectual properties and sell goods and services in a designated territory for a specified time. The franchise fee, which is the consideration to the franchisor, makes the contract binding and enforceable. An elaborate contract should address all the aspects of the business, including:
- Franchise fees;
- Remittance of royalties;
- Lease agreement;
- Rights and restrictions;
- Duties and responsibilities;
- Breach of contract;
- Dispute resolution;
- Cancellation policy, and
- Exit strategies, among others.
The terms of a franchise contract should be adhered to by the transacting parties. There are various franchise exit strategies for any party wishing to sever a franchise relationship.
How to Exit a Franchise Agreement
Not all franchise relationships thrive or work as intended. The best course of action would be to terminate the franchise agreement if you've tried everything to make it successful in vain. However, exiting an agreement should be guided by the contract or the applicable franchise law in your state. Terminating your contractor illegally can attract financial and legal consequences.
While most franchise contracts terminate at the expiry of the contract, some can terminate early if:
- There's material breach of contract, or
- Either party declines to renew the contract.
Most franchise contracts include termination clauses, which becomes effective if any party to a franchise agreement wishes to exit. The termination clause specifies the conditions under which the agreement can be exited or suspended by any of the transacting parties. Most termination clauses recommend the following actions when terminating a franchise contract.
- Suspend the agreement if there's a “material breach” of contract;
- Terminate the agreement if a material breach keeps occuring;
- Terminate the agreement if a material breach isn't resolved within a specified time after it has been brought to the attention of the franchisee.
A material breach involves violating the term(s) of a franchise agreement in a way that the contract is no longer valuable or beneficial to the aggrieved party. Franchisors can terminate the contract if the franchisee:
- Engages and convicted of a crime;
- Loses a license or defaults a lease;
- Fails to remit royalties;
- Fails to fix defaults brought to their attention within a reasonable time;
- Becomes bankrupt or insolvent;
- Disobeys franchisor's requirements on location and appearance;
- Violates legal business practices, among others.
On the other hand, franchisee can terminate the contract if:
- They're not given training and support as stated in the contract;
- The franchisor commits fraud or misrepresents crucial information during the buying;
- The franchisor doesn't protect their territories;
- The franchisor becomes bankrupt or insolvent.
The franchise agreement regulates the mode of operation of the business and the franchisor-franchisee relationship. It also defines what happens after termination.
Remedies for Breach of a Franchise Contract
A breach of contract inconveniences the aggrieved party because they're denied the benefits of the relationship. You should seek justice if your partner has breached the terms of your contract. If you're facing a breach of contract issue, it would be important to consult a franchise agreement attorney to help you determine the remedy that can help your case. The remedies for a contract breach can include:
1. Compensatory Damages
These damages compensate for the plaintiff for all financial losses resulting from the contract breach. Compensatory damages are categorized into two; expectation damages and consequential damages.
Expectation damages are awarded for direct losses linked to a contract breach while consequential damages cater for indirect consequences of a contract breach.
2. Specific Performance
Here, the defendant is ordered by the court to fulfill their end of the bargain.
3. Injunction
The court prohibits the defendant from taking a specific action. Injunctions may be temporary or permanent.
4. Rescission
In this case, the aggrieved party is allowed to terminate the contract as a remedy for a material breach. This remedy doesn't involve monetary compensation.
5. Liquidated Damages
The parties to the contract negotiate a fair and just compensation, also known as liquidated damages, for a contractor breach.
6. Nominal Damages
This remedy is applicable if the plaintiff lacks sufficient evidence to prove that they're entitled to compensatory damages. In this case, courts acknowledge a breach of contract, even when loss can't be calculated.
The consequences of violating the terms of a franchise contract can vary by the seriousness of the violation. A legal professional specializing in franchise or business law can advise you more on this subject.
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