Breaking Away From the Franchisor or Supplier
At their core, franchises and distributorships are business partnerships governed by the law of contracts and applicable law. For many reasons, franchisees may become unhappy with the partnership and seek to find a way out before the end of the agreement. But unless the contract expressly allows the franchisee to terminate it, or the franchisor does something (or fails to do something), which in some circumstances may allow the franchisee to terminate the agreement (or to treat them has having terminated it), if the franchisee walks away from a contract, it will be in breach of its terms and potentially liable to pay damages to the franchisor. The amount of that liability is typically the amount necessary to put the franchisor other party into the position they would have been in if you had complied with the contract terms. So, for example, if you are a franchisee and you decide to team up with another franchisor or go independent 6 months into a 5 year agreement with your current franchisor, you could be liable to pay an amount equivalent to the aggregate monthly fees payable had you stayed. You might also be subject to an injunction or a non-competition provision, in which you case you may be forced out of business if the franchisor brings a motion for an injunction.
There are scenarios where the other party’s conduct may enable you to walk away from a contract. For example, where the other party has failed to comply with a material obligation, performance of which is deemed, either by the general law or by the parties, to be so fundamental to the bargain that the non-defaulting party should be allowed to terminate the contract if it is not complied with. By way of example, Robert recently represented a local representative in a case where the home office refused to pay the agreed commissions. The local representative went independent and the home office sued for an injunction to enforce a non-competition provision. The Court ruled in favor of the local representative and found the local representative was entitled to go independent because the home office materially breached the contract by refusing to pay commissions. A copy of the Court’s order can be found here.
Although it will actionable to break a contract by walking away from it in other circumstances, it may still make commercial sense to do so. If the other party would be unable to show that it would have been better off financially if you had adhered to the terms of the contract, there will be no liability to pay damages and therefore there will in practice be nothing the other party can do about it.
In any case, you should seek legal advice before going independent. And if you do choose to go independent or to stop paying royalties, you must absolutely de-identify completely from the franchisor’s brand and take down all signs and return all manuals. One of the biggest forbidden acts in franchising is to stop paying royalties but continue to use the franchisor’s trademark.
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