Can you break a franchise agreement once you’ve signed it?

Article by Andrew Quick

Stevens & Bolton

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In this exclusive article, Andrew Quick, Partner at Stevens & Bolton LLP, looks at the different scenarios where a franchisee may be able to walk away from a contract. 

The strict answer to this question is yes you can, but only in certain circumstances will it be lawful and not cost you money to do it.

Unless the contract expressly allows you to terminate it, or the other party does something (or fails to do something) which allows you to terminate it (or to treat them has having terminated it), if you walk away from a contract you will be in breach of its terms and liable to pay damages to the other party.

The amount of that liability will be the amount necessary to put the other party into the position they would have been in if you had complied with the contract terms.

Agreement terms

So, for example, if you are a franchisee and you decide to team up with another franchisor 3 months into a 5 year agreement with your current franchisor, and a monthly management service fee would have been payable under that agreement, you will be liable to pay an amount equivalent to the aggregate monthly service fees which the current franchisee can show would have been payable had you stayed.

Examples of where the agreement may allow you to do so include on the expiry of a fixed term, or on the giving of a minimum period of notice, or on the happening of a specified event. You will need to ensure that any notices required by the agreement are provided strictly in accordance with its terms.

Typically, a franchise agreement will reserve to the franchisor the right to terminate the agreement in the event of a serious breach by the franchisee, or even a less serious breach which the franchisee has failed to remedy having been given an opportunity to do so.

The rights expressly given to a franchisee to terminate will usually be very limited, and there may be none at all, so a franchisee may only be able to get out of the franchise agreement if the franchisor’s conduct entitles it to do so.

Termination Options

There are two scenarios where the other party’s conduct may enable you to walk away from a contract.

First, where the other party has failed to comply with an obligation, performance of which is deemed, either by the general law or by the parties, to be so fundamental to the bargain that the non-defaulting party should be allowed to terminate the contract if it is not complied with.

By way of example, the Sale of Goods Act 1979 implies into any contract for the sale of goods a term that the goods should be of satisfactory quality and if they are not the buyer is able to reject the goods, secure a return of any payment made, and even to claim compensation for any additional costs incurred in sourcing goods of satisfactory quality from elsewhere.

Secondly, where that party’s conduct is entirely inconsistent with any acceptance on its part that it is bound by the contract’s terms such that it is deemed to have “repudiated” the contract, as a result of which the innocent party is able to treat the contract as terminated.

Certainly, in the example given above, the franchisee walking away and joining another franchisor before the current franchise agreement has expired would amount to a “repudiatory breach” of the franchise agreement such that the franchisor could regard it as terminated.

Likewise, if a franchisor consistently denied the franchisee access to the business systems such that the franchisee could not operate its business as envisaged by the franchise agreement, it could fairly claim that the franchisor had repudiated the contract and, as a result, walk away.

Although it will be unlawful to break a contract by walking away from it other than in the circumstances described above, it may still make commercial sense to do so. If the other party would be unable to show that it would have been better off financially if you had adhered to the terms of the contract, there will be no liability to pay damages and therefore there will in practice be nothing the other party can do about it. In a franchise relationship, such situations are difficult to envisage and any decision to walk away on this basis should only be taken with the benefit of formal legal advice.”

Andrew Quick, Partner

Stevens & Bolton LLP