If you’re a franchisor, and your franchisee is refusing to comply with their obligations, you may be able to issue a “breach notice”. Whether you can depends on your particular circumstances and arrangement with the franchisee. Below, we outline when and how to issue a breach notice as well as what it should include.
1. Do You Have a Signed Franchise Agreement?
If you have a signed contract as part of your franchise negotiations, you can then refer to the terms of this agreement to identify the key responsibilities of each party. You can treat a signed franchise agreement as a signed legal contract.
2. What are the Terms of the Franchise Agreement?
Assuming you have a signed agreement, the next question to answer is: what are the rights and responsibilities that are set out in this contract?
Let’s say, for example, that you have franchised a coffee business. One of your franchisees will only buy “Average Blend” coffee beans. However, you only want your franchisees to use “A Latte Beans” coffee. You have repeatedly asked your franchisee to purchase “A Latte Beans” coffee, but they are refusing to do so.
If you’re claiming that one of your franchisees is breaching their obligations, you need to be clear about what this obligation is, and where the obligation stems from in the agreement. It’s not enough to say that your franchisee is doing the “wrong” thing – you need to have a reason why it is “wrong”.
The franchise agreement and the operations manual are the key franchise documents that will govern your franchisee’s responsibilities. You should review the franchise documents, and identify any explicit terms of the agreement that govern the behaviour in question.
In circumstances where there is an explicit term in the franchise contract, you can then point to this clause as a reason why the franchisee is breaching the agreement.
Returning to our example above, if there is a clause in your franchise agreement that says your franchisees must only use suppliers approved by you when purchasing products for their café, this will provide support for your legal position. If the contract clearly lists “A Latte Beans” as the approved supplier for coffee beans, and “Average Blend” has never been approved, you can show that there are terms in the agreement that expressly state that your franchisee is doing the wrong thing.
3. Issuing a Breach Notice
If your franchisee appears to be breaking an express term of the franchise agreement, you may have the right to issue a “breach notice” under the Franchising Code of Conduct (the Code).
Clause 27 of the Code applies to the conduct of franchisees on or after 1 January 2015 (being the date that the new Franchising Code of Conduct came into effect, after recent amendments). Under clause 27, you can provide written notice to a troublesome franchisee notifying them that you believe they have broken the rules of your franchise business, and stating that you intend to terminate the franchise agreement unless they take certain actions to fulfil their legal obligations.
If the franchisee doesn’t do what you ask them to, you could then terminate the franchise agreement because of this breach. Alternatively, you could try to resolve the situation through the relevant franchise dispute resolution procedure. If the franchisee does comply with the breach notice, you cannot terminate the agreement because of their previous wrongdoings.
4. What Should Be In a Breach Notice?
The Code explicitly specifies the sort of information that you must include in a breach notice. It involves setting out in writing what they’re doing wrong, why it is wrong, and how you want the franchisee to address the issue.
To comply with the statutory requirements under the Code, the notice must:
- Be in writing;
- Tell the franchisee that you are proposing to end the franchise agreement because of the breach;
- State what you want the franchisee to do to fix the breach; and
- Give the franchisee a reasonable deadline to rectify the breach.
The maximum period that you have to provide the franchisee to remedy the breach does not need to be more than 30 days (keeping in mind that shorter periods must still be “reasonable”). You should also clearly state what terms of the franchise relationship the franchisee is breaching, and how they are violating these obligations.
Our specialist franchise lawyers can review your franchise agreement and provide you advice on whether the franchisee is breaching their obligations, and whether you have the right to issue a breach notice. We can also prepare the breach notice for you so that you can be sure that your notice complies with your legal obligations under the Code. Questions? Get in touch on 1300 544 755.