Franchisees of Pie Face outlets have been left in the dark as the company fell into voluntary administration early this week.

While Pie Face Group claims it’s “business as usual”, more than 70 franchisees have been left scratching their heads as to their rights and entitlements following the announcement.

The news was broken to the group of franchisees and managers on Tuesday in an emergency meeting, and many were left wondering where to from here.

While certain assurances have been made to the group of franchisees that the first stores to be closed would be the company-owned outlets, this has left many unanswered questions as to what led to a situation where the livelihood of many families is now at risk.

Have Pie Face sealed the fate of their many franchisees? What rights do franchisees have moving forward?

This article explores the situations in which a franchise agreement can be terminated without the franchisee breaching the franchise agreement.

In what circumstances can a franchise agreement be terminated?

Entering a franchise often requires a franchisee to commit themselves to the franchise system for up to 10 years, which is why anyone considering entering into a franchise agreement should first seek legal advice from an experienced franchise solicitor.

But what happens when you no longer want to be involved in the franchise relationship? What happens when you want to separate from your franchisor or franchisee? Under what circumstances is this allowed?

The Franchising Code of Conduct, known more commonly as the Code, sets out a number of requirements that parties must satisfy when seeking to end a franchise agreement. These may further be explored in the contract, i.e. the Franchising Agreement.

The code explains the circumstances under which termination of a franchise agreement is possible, including:

  • When the franchisee has breached the franchise agreement;
  • Special circumstances; and
  • Where the franchisee has not breached, but a provision within the franchise agreement may allow termination.

Franchisee has not breached

In some exceptional circumstances, franchisors will be entitled to terminate prior to the expiration date of the franchise agreement, despite the franchisee not breaching or consenting to terminating the agreement.

Franchisors are required to give an explanation to the franchisee as to why they are terminating, along with reasonable notice. Generally, there are certain ‘triggers’ in the Franchise Agreement that will also allow termination; whether any have occurred in the Pie Face case is not known without having access to the Franchise Agreement.

It should be noted that including a clause that allows the franchisor to terminate the franchise agreement without needing the consent of the franchisee will not be regarded as adequate consent.

In other words, there must be a notice period and it must be reasonable. A court may disregard the proposed notice period if they determine it to be unreasonable or inadequate, irrespective of the terms of the franchise agreement.

The terms of the franchise agreement will become very important in assessing firstly its compliance with the Code, and secondly whether it permits Pie Face Group to terminate the franchise agreements. The voluntary administration process requires the administrators to comply with the terms of the franchise agreements, they are simply standing in the place of the franchisor. However, one of the other jobs of the administrator is to keep the operations of the franchise company continuing as a going concern; in reality this means cutting the fat, and getting rid of any unprofitable arms of the business (including any franchisees who are not resulting in profit for the franchisor company).

Franchisors in Australia also have very specific requirements of disclosure whereby their financial position ought to have been known, at least to an extent, to the franchisees. If it’s found this disclosure was not given properly or there was some misleading information disclosed, further causes of action may be available to the franchisees (as well as potentially having to face an ACCC investigation).

If, as a franchisor, you wish to terminate the agreement without the consent of the franchisee, you should be careful not to act in a way that might be regarded as unconscionable conduct during the termination process.

Keep in mind that proceeding to termination will give the franchisees a right to utilize the dispute resolution procedures that are detailed in Part 4 of the Code.

 

Emma Jervis

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