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If you are a franchisor dealing with a difficult franchisee, you may consider ending the relationship. The Franchising Code of Conduct (the 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.

It should also be noted that there may be other circumstances in which a franchise agreement can be terminated, including where the: 

  • parties agree to terminate; or
  • franchisor terminates in accordance with section 28 of the Code. 

The Franchisee is in Breach of the Franchise Agreement

In determining whether a franchisee has breached the terms of their franchise agreement, you must first carefully consider:

  • what the terms of the franchise agreement are; and 
  • if the franchisee’s behaviour is a breach of the terms of the franchise agreement.

If a franchisee breaches the franchise agreement terms, you can generally take steps to commence the termination process. It is important that you carefully classify any of the alleged breaches against the franchisee that you intend to rely on, including compiling any relevant evidence to support the breaches. Each breach can then potentially act as a reason to commence termination. 

Issue a Breach Notice

If you have identified a breach and wish to take steps to terminate the franchise agreement, you must first issue a breach notice. 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.

You should ensure that any such breach notice outlines:

  • the breach(es) of the franchise agreement, including reference to the relevant clauses of the franchise agreement that have been breached;
  • that you are proposing to terminate the franchise agreement because of the breach(es);
  • what steps you want the franchisee to take to fix the breach(es); and
  • how long the franchisee has to rectify the breach(es).

You must provide the franchisee with a ‘reasonable’ period to rectify 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 at a minimum. However, you should allow a longer period if a longer period is reasonable in the circumstances.

If you fail to include all the required information in your breach notice (see above), you could face civil penalties under the Code. Additionally, any termination that occurs in reliance on the relevant notice could be deemed to have no effect.

Issue a Termination Notice

If you have notified the franchisee by issuing a breach notice and they have not rectified the breach within the reasonable period stated, you may be able to issue a termination notice once that period expires. However, whether you can proceed to terminate based on the breach notice needs to be assessed on a case by case basis. The steps the franchisee takes after they receive your breach notice are important, as this may greatly affect your rights to terminate.

If the franchisee promptly responds to the breach notice and rectifies all the breaches raised, you cannot continue with termination. In the future, a breach notice can be issued if the franchisee breaches the agreement again. However, you cannot rely on any previous (remedied) breach notice to terminate a franchisee, even if they repeat the conduct, which amounts to a breach.

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Bankruptcy, Voluntary Abandonment and Special Circumstances

Under the Code, you can terminate a franchisee by providing seven days written notice in particular circumstances. The special circumstances allowing for termination include 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; or
  7. commits fraud in relation to the franchise.

You can also terminate if the franchisee agrees to end the franchise agreement.

If the franchisee does not dispute the notice within seven days, you may proceed to terminate the franchise agreement. However, if the franchisee disputes the notice, you cannot terminate until at least 28 days after the notice was issued. 

Dispute Resolution

At any point throughout the termination process, either you or the franchisee can invoke the dispute resolution procedure set out in the Code. For example, the franchisee may disagree with your characterisation of the alleged breach or wish to ‘plead’ special circumstances and may issue you with a formal dispute notice setting out its position. 

If a dispute notice is issued, there is nothing in the Code that specifically precludes your ability to terminate on the basis that the party did not rectify a breach set out in a breach notice. However, most franchisors choose not to terminate in this circumstance. This is because in doing so, there is a risk an injunction may be sought by the franchisee.

Key Takeaways

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

For help with the most practical and effective way to usher a troublesome franchisee out of your network while protecting your legal interests, our experienced franchise lawyers can assist 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

What is a ‘reasonable period’ to rectify a breach?

What is a reasonable period depends on the circumstances of each case. Your franchise agreement may specifiy a reasonable period, in which case you must comply with this timeframe at a minimum. However, you should allow a longer period if it is reasonable in the circumstances.

What are the ‘special circumstances’ for termination?

The Code lists seven circumstances that allow for ‘special circumstances’ termination. These are listed in the article above.

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