Franchising can be an effective way to run a business with the backing of an established brand, but disputes between franchisors and franchisees are not uncommon.
Franchise disagreements can be costly and time-consuming, and you may start to question if it is possible to recover your losses or even exit the franchise agreement.
Our Senior Associate, Gareth Brazier, explains what your legal rights are when a franchise relationship breaks down and how to reach a practical solution.
What are the common causes of a franchise dispute?
A franchise agreement sets out the terms and conditions of the relationship between the franchisor and franchisee.
This can include a franchisee’s rights to use the franchisor’s contract brand, business model, systems and trademarks to sell products or services.
It details all aspects of the franchise agreement, including initial training, ongoing support, royalties, territory rights, duration of the relationship and termination clauses.
The most common causes of a franchise dispute are due to misleading information, failure to meet performance expectations and disputes over territorial rights.
Other common causes include:
- Breach of contract – Where one party fails to comply with the terms set out in the franchise agreement
- Misrepresentation – This can include where a franchisee has relied on inaccurate or overstated claims about profits or turnover
- Intellectual Property (IP) disputes – These issues can arise where a franchisee uses the franchisor’s brand name or logo outside the permissions granted under the agreement
- Performance issues – This includes underperformance by the franchise or failure by the franchisor to provide the agreed level of training or support
- Territorial encroachment – These disputes are caused when franchisors or other franchisees operate too close to an agreed territory and potentially undermine exclusivity
- Termination issues – These can arise when a franchisee seeks to exit the agreement, often involving the enforceability of post-termination restrictors or covenants
What are a franchisee’s legal rights in a dispute?
A franchisee’s legal rights should be set out in the franchise agreement and franchisors are required to act in good faith.
Many franchise agreements include dispute resolution clauses that require the parties to attempt to resolve disagreements before starting court proceedings.
Any dispute that arises should begin with negotiation, in which you should try to reach a solution directly with your franchisor.If this does not resolve the issue, mediation may be required and an independent third party can help both sides discuss settlement options.
While mediation is not always binding (unless the parties decide upon a binding settlement), it often results in a practical comprise or at least a narrowing of issues in dispute, and can help avoid lengthy legal action.
Arbitration can be helpful if nothing else has previously worked and an arbitrator will consider all the evidence to make a binding decision.
If alternative dispute resolution fails, you may need to make a court claim. A court can award compensation, declare the agreement terminated or grant other legal remedies depending on your claim.
Can you get your money back or exit the agreement?
Recovering money from your franchise agreement can be possible, but refunds or repayment of franchise fees are only more likely when there has been a serious or fundamental breach of contract.
If you are dealing with a serious breach, you may seek to rescind the agreement and be restored to your original financial position.
The chance of exiting a franchise agreement depends on the wording of the contract and the facts of the dispute.
Most franchise agreements are drafted to discourage early termination, and walking away without proper legal advice can lead to claims for damages or enforcement of restrictive covenants.
However, with the right support, we can help you potentially negotiate an agreed exit or settlement that limits financial risks and allows both parties to move on.
How can we help?
Whether you are looking to resolve a franchise dispute or exit from an agreement, we can help you achieve the most practical and cost-effective outcome.
We can review your franchise agreement and any breaches and advise you on the best dispute resolution options.
Our team can help ensure compliance with post-termination obligations such as non-compete clauses and confidentiality requirements.
To learn more about how we can support commercial and business disputes, contact us today.
