So you have a franchisee that isn’t playing by the rules of your franchise business. You’ve responded by issuing a franchise breach notice setting out what they’re doing wrong in writing and given the franchisee a specified timeframe to fix the situation. What happens next is largely driven by how the franchisee chooses to respond. Below, we discuss what can happen after you provide the franchisee with a breach notice.
We will also discuss your rights and obligations under the amended Franchising Code of Conduct (the Code) which came into force on 1 January 2015. If you entered into the franchise agreement with the troublesome franchisee on or before 31 December 2014, different obligations might apply (unless you renewed, varied or transferred the agreement after this date).
Scenario 1: The Franchisee Remedies the Breach Before the Notice Period Expires
Unless you wanted to end the franchise relationship, this is obviously the best-case scenario. Both parties will not need to incur any further costs, and all parties can forge ahead, business-as-usual.
It is important to keep in mind that if the franchisee fixes the breach within the specified timeframe, you cannot then rely upon the breach as a reason for proceeding to terminate the franchise agreement. This rule comes from clause 27 of the Franchising Code of Conduct (the Code).
Scenario 2: The Franchisee Challenges Your Notice
The franchisee may disagree with the contents of your notice. Perhaps the franchisee does not view their actions as giving rise to a breach, contrary to how you have interpreted their conduct. Or maybe they argue that you have not provided them with a “reasonable” period to rectify their actions. Whatever the reason for challenging your breach notice, the Code contains clear procedures for resolving disputes.
If there is a dispute concerning your proposal to terminate their agreement based on the breach, Part 4 of the Code governs the process. You can pursue the internal dispute resolution procedure or the process set out in Division 3 of the Code. The franchisee should notify you of the dispute in writing, and you should try and decide on how to resolve your disagreement. The issue can be referred to mediation if you cannot agree on the resolution procedure.
Keep in mind that the statutory obligation of “good faith” applies to the franchise dispute resolution process. The Code also requires both you and the franchisee to bring a “reconciliatory” approach to the disagreement. As a result, you should take any challenge by the franchisee seriously, and engage properly in the process.
Scenario 3: The Franchisee Doesn’t Remedy the Breach
Once the period set out in the notice expires, you have two options:
- Terminate the agreement; or
- Start the dispute resolution process.
If you terminate because of the franchisee’s breach and failure to remedy, and the franchisee then challenges this termination, the Code procedure described above would also apply.
If you have any questions about your dispute or need assistance drafting the termination notice, get in touch with our franchise team on 1300 544 755.