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A key aspect of a successful franchise system is compliant franchisees. However, as a franchisor, you may face a situation where a franchisee is not complying with its obligations. In such a situation, as a franchisor, you may be able to issue this franchisee with a ‘breach notice’. This will advise the franchisee that if the non-compliance is not rectified, you may terminate the franchise agreement.

However, it is important to note that a ‘breach notice’ is not appropriate to issue in all circumstances. Issuing a franchisee with a breach notice in the wrong circumstances could expose you to several claims, including breach of good faith or unconscionable conduct. Additionally, issuing a breach notice will strain the franchise relationship. Given these factors, we set out some of the key questions and considerations before issuing a breach notice below.

1. What Does Your Franchise Agreement Say?

When considering issuing a breach notice, consider whether there is a signed franchise agreement between you and the franchisee. This is an important question as the franchise agreement contains the terms and conditions of your relationship.

This franchise agreement is the legal contract between the parties which governs the terms and conditions of your relationship. You can use the franchise agreement to refer to the terms and conditions, and determine which actions of the franchisee constitute a breach of the franchise agreement.

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2.   Identify Franchise Agreement Terms

If there is a signed franchise agreement in place, the next step is to identify the rights and responsibilities set out within the franchise agreement.

This is important because if you claim your franchisee is non-compliant, you must identify their contractual obligation and where it stems from within the signed franchise agreement. It is not sufficient that you do not consider the franchisee’s conduct is in line with its obligations. Generally, this obligation must come from the franchise agreement itself.

For example, suppose a franchisee does not purchase coffee beans from an approved supplier despite your repeated request for the franchisee to do so. In that case, you must contain this obligation to purchase from the approved supplier within the franchise agreement. In this situation, if a clause provides that the franchisee must purchase coffee beans from an approved supplier, the franchisee’s failure to do so is a clear breach of the franchise agreement.

3.   Issuing a Breach Notice

You have a franchise agreement, and you have identified that your franchisee has engaged in conduct that breaches an obligation within its franchise agreement. Now, you likely have a right to issue a breach notice under clause 27 of the Franchising Code of Conduct (Code).

In accordance with clause 27 of the Code, where a franchisee breaches the franchise agreement, the franchisor may propose a termination of the franchise agreement. If a dispute arises from a breach notice, the dispute resolution procedure under Part 4 of the Code will apply to the parties.

4.   What Should be in a Breach Notice?

The Code requires that you include particular information in a breach notice. To comply with the Code, your breach notice must:

  • be in writing;
  • give the franchisee notice that the franchisor proposes to terminate the franchise agreement because of the breach;
  • clearly identify the term/s of the franchise agreement which have been breached and the franchisee’s conduct that violates this term;
  • advise the franchisee of what they must do to remedy the breach; and
  • provide the franchisee with a reasonable amount of time to remedy the breach (a ‘reasonable time’ need not be more than 30 days).

If the franchisee remedies the breach, you must not terminate the franchise agreement because of that breach. This is the case even if the franchisee repeats the same breach in the future. 

Key Takeaways

Identifying whether a franchisee’s conduct breaches a term of the franchise agreement is not always a simple task. Therefore, you should consider carefully the circumstances surrounding the breach before issuing a breach notice.

Our specialist franchise lawyers can review your franchise agreement and provide you with advice on whether the franchisee has breached its obligations and whether you consequently have a right to issue a breach notice. They can assist you as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions

Can I terminate my franchise agreement with a franchisee due to a breach of franchise agreement terms?

Not immediately. You must issue a breach notice, and then allow the franchisee a reasonable amount of time to remedy the breach.

When can I issue a breach notice?

You can issue a breach notice when a franchisee breaches a term of a signed franchise agreement.

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