Franchisors and franchisees enter into a franchise agreement that governs the terms of their relationship. As a franchise arrangement usually applies for at least one or more years, either the franchisor or franchisee may breach the agreement during the term. In the case of breaches, particularly breaches that affect the operation of the franchise, either party may issue a breach notice and so it is important to understand both how to issue a breach notice and respond to a breach notice. This article runs through the standards inclusions of a breach notice and what to do if you, as a franchisor, are issued with one.
Issuing a Breach Notice
The Franchising Code of Conduct sets out the specifics of a breach notice. Accordingly, any notice provided by the franchisor to a franchisee on the basis of a breach of the franchise agreement should include the following:
- the intention of the franchisor to terminate the franchise agreement due to the breach;
- the steps the franchisee needs to take in order to remedy the breach; and
- a “reasonable time” for the franchisee to remedy the breach (does not have to be more than 30 days)
Although the Franchising Code of Conduct proscribes the above process for the franchisor, as a franchisee you should also provide a similar notice if you believe the franchisor is in breach of the agreement.
It is also important to note that aside from breaches, section 38 of the Franchising Code of Conduct also refers to the procedure for the notification of a dispute and the process for handling a dispute between both parties.
Responding to a Breach Notice
If you receive a breach notice, it is important to respond directly to the breaches outlined in the notice. This means addressing whether you agree with or deny the breach and providing reasons for your position. If you deny the breach, it may be useful to receive further legal advice.
Ensure steps to remedy the breach are possible and reasonable
If you agree with the breach you should be wary that failing to follow those prescribed steps could potentially lead to the franchisor terminating the franchise agreement. If you deny the breach, you may wish to provide confirmation of why you will not be undertaking the proposed steps or providing a proposal of the steps you plan to undertake to remedy the breach.
Provide further details
As a sign of good faith, you may wish to provide further details as to why the franchisor may have the view that a breach occurred or reasons surrounding how/ why the breach occurred. This will provide the franchisor with a contextual understanding of the operation of your franchise. Further, this allows any issues with the franchise system to be open to a discussion and resolution.
Look at franchisor’s conduct
It may also be a good time to look at the franchisor’s conduct to determine whether any of their actions could constitute a breach of the franchise agreement. The failures of the franchisor, in some circumstances, may be used as a method for negotiation.
Consider remedies available to the franchisor
You should also understand that the effect of the termination of the franchise agreement may provide the franchisor with possible remedies, including damages.
Being accused of breaching a franchise agreement may cause a franchisee to take offence. However, one of the best tips is to remain calm and to address the matter in an amicable and conciliatory way as possible. It is important to remember that the Franchising Code of Conduct requires all parties to act in good faith.
Running a franchise business is hard work and receiving a breach notice adds to the stress of operating a franchise. When denying the breach or refusing to proceed with the steps a franchisor outlines as a remedy, it is important to be careful as such may lead to the termination of the franchise agreement. If you have any questions or need advice on either issuing or responding to a breach notice, contact one of LegalVision’s franchise lawyers on 1300 544 755.
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