If you are a franchisor dealing with a difficult franchisee, you may consider ending the relationship. The Franchising Code of Conduct (Code) and your franchise agreement will guide your options. This article looks at two circumstances under which a franchisor can terminate a franchisee: 

  1. when a franchisee has breached the franchise agreement, or
  2. bankruptcy, voluntary abandonment and special circumstances

The Franchisee Is In Breach of the Franchise Agreement

The first step is to read your franchise agreement and ask yourself: 

  1. What are the terms of the franchise agreement? 
  2. Is the franchisee’s behaviour a breach of these terms of the contract?

If a franchisee breaches the franchise agreement, you can instigate the termination process. In most cases, where a franchisee has breached the franchise agreement, there will be more than one actionable breach. Each breach can then potentially act as the reason to commence termination.

Issue a Breach Notice

You must issue a breach notice before taking any further steps to terminate. Under section 27 of the Code, you must first tell the franchisee that you consider they are in breach of the agreement before issuing a termination notice.

What Should the Breach Notice Set Out?
  1. the breach(es) of the franchise agreement,
  2. that you are proposing to terminate the franchise agreement because of the breach(es),
  3. what steps you want the franchisee to take to fix the breach(es), and
  4. how long the franchisee has to fix the breach(es).

You must provide the franchisee with a ‘reasonable’ period to fix the breach. What is reasonable depends on the circumstances of each case. If your franchise agreement specifies a reasonable period (e.g. 14 days), you must comply with this timeframe. The Code only specifies that you are not required to provide your franchisee with more than one month to fix the breach. If you fail to include all the required information in your breach notice (see above), you could face a fine of up to $54,000.

Issue a Termination Notice

If you have notified the franchisee and they have not fixed the breach within a reasonable period, you can issue a termination notice once that period expires. The situation, however, isn’t always straightforward and the actions a franchisee takes after they receive your breach notice can affect your rights to terminate.

If the franchisee turns the situation around and remedies their breach, you cannot continue with termination. A breach notice can be issued if the agreement is breached again. You cannot, however, rely on any previous (remedied) breaches to terminate a franchisee.

Bankruptcy, Voluntary Abandonment and Special Circumstances

You can terminate a franchisee without providing reasonable written notice in particular circumstances.

Standard franchise agreements usually state that you can terminate the contract if the franchisee:

  1. loses a licence that it requires to operate the franchise;
  2. goes bankrupt or insolvent;
  3. is deregistered by ASIC;
  4. voluntarily abandons the franchise;
  5. is convicted of a serious offence;
  6. risks the health or safety of the public because of how they are running the franchise;
  7. commits fraud in relation to the franchise; or
  8. agrees to end the franchise agreement.

Under section 29 of the Code, you can terminate without prior notice to the franchisee. You can then issue a notice to the franchisee that they have been immediately terminated.

Dispute Resolution

At any point throughout the termination process, either you or the franchisee can invoke the dispute resolution procedure. For example, the franchisee may disagree with your characterisation of the alleged breach, and may issue you with a formal dispute notice setting out its position. If this occurs, you can move forward with the dispute in accordance with your franchise agreement, or by adopting the procedure set out in the Code.

Key Takeaways

Terminating a franchisee is rarely a straightforward process. It’s important you understand your obligations under your franchise agreement and the Code. Termination will not, in and of itself, resolve any outstanding breaches – a critical factor to consider in circumstances where the franchisee owes you money. 

Our specialist  franchise lawyers can step you through the most practical and effective way to usher a troublesome franchisee out of your network while protecting your legal interests. If you have any questions, get in touch on 1300 544 755 or fill out the form on this page.

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