When Can a Franchisee Cancel a Franchise Agreement?

In Short

A franchisee’s right to cancel a franchise agreement depends on the contract and the Franchising Code of Conduct. In limited circumstances, such as during the cooling-off period, a franchisee may have a statutory right to terminate. Outside those situations, ending the agreement early can amount to breach of contract and expose the franchisee to financial consequences.

Tips for Businesses

Carefully review the franchise agreement and the Franchising Code of Conduct before attempting to cancel. Check whether a cooling-off period applies and whether there are agreed termination rights. Consider the financial impact of early exit, including damages and ongoing obligations. Keep clear records of communications and seek clarity on your contractual position before taking action.

Summary

This article is a guide for Australian franchisees on cancelling a franchise agreement under contract law and the Franchising Code of Conduct. LegalVision’s business lawyers explain the legal position and practical risks; LegalVision, a commercial law firm, specialises in advising clients on franchising and commercial law matters.

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On this page

• Cancellation During the Cooling Off Period 
• Early Termination 
• Cancellation Due to Breach 
• Termination as a Contractual Right 
• Obligations Post Termination
• Key Takeaways
• Frequently Asked Questions

Most franchise agreements operate for a fixed term, where each party must carry out their obligations. The Franchising Code of Conduct (the Code) allows franchisees to terminate their franchise agreement in specific situations. Your franchise agreement should outline the circumstances for termination. However, even in unspecified circumstances, the Code will still apply. This article will explore the various situations where you can cancel a franchise agreement. 

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Cancellation During the Cooling Off Period 

As a franchisee, you will endure a cooling-off period after you enter a new franchise agreement. Franchisees are entitled to terminate a new franchise agreement within 14 days of entering the agreement. This cooling-off period starts from the earlier of:

• signing the franchise agreement; or 
• payment of the initial franchise fee. 

If you cancel your franchise agreement within the cooling-off period, you are entitled to a full refund within 14 days of exercising. However, the franchisor can keep the money if:

• it is included in the franchise agreement; and 
• the money is for reasonable expenses.

Early Termination 

According to the Code, franchisees have the right to give a written proposal to terminate a franchise agreement early (at any time). 

This proposal must give reasons for cancellation. The franchisor then has 28 days to provide a substantive response to the proposal. If the franchisor does not agree to accept the franchisee’s proposal for early termination, it must give reasons for its refusal. 

As such, while this early termination proposal does not guarantee a cancellation of your franchise agreement, it does open the conversation for such cancellation or another satisfactory resolution.

Cancellation Due to Breach 

You may have grounds to cancel your franchise agreement if the franchisor fails to fulfil its obligations under the Code. However, this is a grey area, and you should seek legal advice specific to your circumstances. Examples of these obligations under the Code include:

• acting in good faith – an overarching obligation under the Code; and
• information disclosure – for example, if the franchisor fails to disclose the required information (including the disclosure document).

Typically, these Code breaches only allow a franchisee to terminate their agreement if they can prove the franchisee would not have entered the franchise agreement had the breaches not occurred. This is ultimately a matter for a court to determine. 

Termination as a Contractual Right 

Finally, while most franchise agreements are for a fixed term, some franchisors include a right of termination in the notice provision. If you are considering terminating, thoroughly examine your franchise agreement first. 

Obligations Post Termination

If you decide to cancel your franchise agreement, you should refer to your franchise agreement to understand your ongoing obligations and the ‘post termination’ process. This process will usually involve the return of franchisor equipment, provision of log-in details, etc. Further, you will usually have continuing obligations after the Franchise Agreement has been terminated. For example, franchise agreements commonly include a restraint of trade clause. This clause restricts your ability to carry on similar businesses in defined areas and for defined periods. In addition, most Intellectual Property and Confidential Information clauses will survive termination. As such, you must still abide by your obligations post-termination concerning these matters. 

Key Takeaways

Cooling-off periods per Code allow you to cancel your franchise agreement soon after signing. However, after the cooling-off period, you can usually only cancel your franchise agreement with the franchisor’s consent or where the franchisor breaches an important term. If you are looking to exit your franchise agreement, contact our specialist franchising lawyers. We will consider your franchise agreement and circumstances to advise you of your rights.

LegalVision provides ongoing legal support for businesses through our fixed-fee legal membership. Our experienced franchise lawyers help businesses manage contracts, employment law, disputes, intellectual property, and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 1300 544 755 or visit our membership page.

Frequently Asked Questions