Franchise Disputes

It is no surprise that disputes can be common in the franchisor and franchisee relationship. Buying a franchise involves entering into a long-term relationship, which usually lasts 5 or 10 years and requires a high element of trust between the parties.  For some franchisees, it can emotional as they can spend life savings or take out loans to fund their franchise fee and in exchange they seek the support and system that a franchisor can offer.

Disputes can arise when franchisees do not achieve the sort of income they expected to when entering into the franchise agreement. However, this could be down to a number of reasons such as market factors, or a lack of enthusiasm by the franchisee or in some circumstances, be because the franchisor has misrepresented the earning potential. 

Franchisees can also become unhappy when they feel that their franchisor is cutting back on the level of support it provides to save money or when there is a change of ownership and culture within the franchisor company, and franchisees lose that relationship with the founder. 

Disputes against a Franchisor

A franchisee could have a claim for misrepresentation against their franchisor which would entitle them end terminate their franchise agreement. This can arise out of statements made to them by the franchisor (or their representatives) which induce them into signing the franchise agreement. Such statements could be financial projections or success/failure rates in the franchise network which turned out to be false or untrue.

Franchisees often have higher expectations of the performance of obligations by a franchisor than a franchise agreement actually requires them to fulfil.  The franchisor's obligations are generic and far less onerous than the obligations imposed on the franchisee.

A franchisee could have a claim for breach of contract of the franchise agreement if they are able to show that the franchisor has fundamentally or seriously breached a term or terms in the agreement which justifies termination. Franchisees should not be over-confident in assuming they could establish breach of contract on the part of a franchisor concerning their ongoing obligations to provide advice, guidance and support. 

Another dispute against a franchisor could arise when the franchisor has significantly changed the franchise system which deprives the franchisee of the benefit of the franchise agreement. If so then there may be a potential claim for ‘derogation from grant’ and entitle them to terminate their agreement.

Disputes against a Franchisee

Obligations on the franchisee under the franchise agreement are far more specific.  Failure to adhere to these obligations, and the system, can lead to the franchisee being in breach of the franchise agreement and susceptible to the termination if they fail to remedy their failures.

A franchisor could have a claim against a franchisee for breach of contract and enforcement of the post-termination restrictive covenants contained in the franchise agreement. This could be enforceable by way of an injunction if a franchisee is in breach for example, by setting up a similar competing business or soliciting former customers.

Court proceedings, in particular injunction proceedings are expensive and take a considerable amount of time, so jumping the gun and issuing proceedings is not always the most sensible approach to handle disputes. 

How should disputes be approached?

In our experience, disputes are often exacerbated by a failure or lack of communication between the franchisor and the franchisee. If the parties are looking to avoid disputes, it is important that both keep open the lines of honest communication, but if that communication and trust is broken down, it is often difficult to not to be in dispute with the other.

Many franchise agreements contain procedures for resolving disputes before either party can start court proceedings, the only exception being when a franchisor seeks an injunction to prevent competing activity.

Such procedures can include face to face meetings, without prejudice negotiations or mediation. Additionally, if the franchisor is a member of the British Franchise Association, then there could be a clear dispute resolution clause contained within their franchise agreement which includes the option to mediate using the BFA mediation scheme.

Before embarking on issuing court proceedings, both parties need to weigh up the considerable legal costs they would incur and the likelihood of being able to enforce a judgment against their opponent if they were successful. Proceedings can be lengthy, stressful and time consuming for all involved and with little or no prospect of enforcing a judgment at the end, this may deter many claimants from doing so. However, some franchisors will take a strong stance against disputes and see them through to the end to ensure that their brand, reputation and franchisee network remains in place.

It is strongly advisable to seek advice from a franchise disputes specialist, such as Owen White, not just when the relationship has broken down and litigation seems inevitable, but beforehand in order that parties can be focussed on trying to settle their dispute quickly and economically. It is also important to get a clear understanding of costs involved so that there are no unpleasant surprises. If litigation teaches us anything, it is that whilst winning is usually good, losing is catastrophic. 

Author: Russell Ford, IBB Owen White Solicitors. E: Russell.Ford@ibblaw.co.uk

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