Sadly this is a question I am asked rather frequently regarding franchise agreements. What are your options when your franchise business isn’t working out as you had hoped? As there is no specific “franchise law” in the UK, a franchisee must look carefully at the terms of their signed franchise agreement.
Below we set out your various options if you find your franchise business isn’t working out as you had hoped.
Can you give notice to terminate and leave the franchise early?
Generally speaking, no. Almost all UK franchise agreements are for a fixed term of typically 5 years and the franchisee is committed for this length of time to operate the franchise business. If you were to simply cease trading, you could face a claim from the franchisor for its loss of revenue for the duration of the contract left to run.
One option would be to exercise your right to sell the franchise business under the agreement. However finding a buyer is often problematic, especially if the business is in its infancy.
Is the franchisor in breach of contract?
It may be the case that you feel the business hasn’t worked out due to some failing(s) on the part of the franchisor. Perhaps the franchisor hasn’t provided adequate training or support. The problem facing franchisees here, is that franchise agreements are drafted in favour of the franchisor and more often than not, do not contain an express contractual right for a franchisee to terminate the agreement due to the franchisor’s material breach of contract. Additionally a franchisor’s contractual obligations under the agreement are often drafted in a vague manner so that it is not always easy for a franchisee to be able to point to clear contractual obligations which the franchisor is in breach of.
Alternatively a franchisee may be able to terminate under their common law rights, but only if the breach is so fundamental that it has deprived the franchisee of substantially the whole benefit of the contract. For example, no manual or training has been provided whatsoever. In practice however a franchisor’s “breaches” are not so clear cut and the franchisee’s complaint may have arisen due to the cumulative effect of a series of failings.
Do you have a claim for misrepresentation?
Due to the difficulties in showing a franchisor’s fundamental breach of contract, franchisees often also look to the law on misrepresentation to see if that can offer a way out. In franchising terms, a misrepresentation is usually associated with financial projections for the franchise business being plainly incorrect or recklessly made by the franchisor. The misrepresentation must have induced the franchisee to enter into the agreement.
If successful, the franchisee is able to rescind the contract and be put back in the position they were in prior to signing the franchise agreement.
Many franchise agreements contain clauses attempting to exclude a franchisor’s liability for misrepresentation. However, such clauses must pass a test of reasonableness in order to be enforceable. In the recent case of Ali v Abbeyfield VE Ltd (2018) the franchise agreement of Vision Express franchisees contained a clause excluding liability for any pre-contractual statements except for those which were annexed in writing to the agreement or pre-contractual statements made fraudulently. The clause was considered to be unreasonable by the court because:
Are you in breach of the contract?
It is important for franchisees to remember that if the franchisee business isn’t working out, despite any perceived failings of the franchisor, they may too be in breach of the franchise agreement. In contrast to the position for franchisors, franchise agreements contain many onerous and specific obligations on franchisees which could be relatively easy to fall foul of.
I would strongly advise franchisees not to seek to terminate their agreement or simply to cease trading without first taking legal advice in order to understand their options and what the repercussions could be of each option. As mentioned above, you could find yourself facing a significant financial claim or counterclaim from your franchisor if you bring your agreement to an end incorrectly. Franchise agreements also contain restrictions on what a franchisee can and can’t do once the agreement has terminated. Such clauses could prevent a franchisee from working in a competitive or similar business for a period of time post-termination.
And if you are reading this prior to signing a franchise agreement, please do undertake your due diligence properly on the franchise and ensure you fully understand the terms you are signing up to. It is all too easy to get carried away with the excitement of running your own business and wanting to get started but time spent on this at the outset could help prevent a costly mistake.
For franchising advice, whether you are a franchisor or a franchisee, please contact me. Paris Smith is an affiliate member of the British Franchise Association.
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