Franchise Disputes

Relationships between franchisors and franchisees do not always run smoothly and, where a conflict occurs, knowing how to handle it is essential.

As the franchise agreements that govern these relationships tend to be complex and comprehensive, strong specialist legal expertise can make all the difference to the outcome you are able to achieve. That said, having a grounding in the key issues can be a good place to start when considering your situation before seeking legal advice.

In this article, we will cover some of the key questions related to franchise disputes, including what are the most common areas of conflict in franchising, what happens if a franchise agreement is breached and how franchise law disputes can be resolved.

While we hope this information will be helpful for anyone facing franchise conflicts, please note that it should not be taken as specific legal advice. Every situation is unique, so we strongly recommend speaking to an expert in franchise contract disputes for tailored advice.

If you would like immediate advice on franchise disputes or any other issues related to franchise law, please contact the Franchising team on 03456 381381 or email enquiries@ibblaw.co.uk to set up a meeting.

What are the most common areas of franchising conflict?

There are various types of franchise agreement breaches that can lead to conflict, including:

Non-payment of franchise fees

A key provision of any franchise agreement will be the payment of regular franchise fees by the franchisee to the franchisor. If the franchisee fails to make these payments, then they risk being in breach of the agreement and the franchisor may have the right to terminate the franchise.

In some cases, the franchisee may argue that they are unable to pay the fees because their franchise is not generating enough revenue. This may then involve other areas of dispute, such as whether the franchisor has misrepresented the opportunity a particular franchise offers (see below for more details on this).

Alternatively, the franchisee may be deliberately withholding payment of the fees because they are unhappy with the franchisor’s conduct e.g. they do not feel they are getting enough support from the franchisor.

Getting to the root of the problem will be essential for the franchisor so they can then take the most appropriate action to resolve the situation quickly and cost-effectively.

Failure to maintain operational standards

If a franchisor feels that a franchisee is not operating their franchise in line with agreed standards, they may, understandably, worry that this could harm the income from that franchise, as well as also risking damage to the reputation of the overall brand.

To minimise the risk of this type of franchise contract violation, it is important that the expected operational standards are clearly outlined in detail to new franchisees. These standards should be set out in clear documentation and franchisees should receive appropriate training. The franchisor should then actively monitor whether those standards are being adhered to so they can take swift action to correct any discrepancies.

Misrepresentation of the franchise opportunity

Where a franchisee is not making the level of revenue they were anticipating from a particular unit or territory, they may begin to question whether the picture of the opportunity provided by the franchisor truly matches the reality. They could then claim that the franchisor has misrepresented the opportunity, either deliberately or through negligence.

As a franchisor, it is essential to have a clearly evidenced rationale for the level of the opportunity as represented to franchisees. This can help to protect you against any claims of wrongdoing.

Inadequate support from the franchisor

A franchise agreement should specify exactly what forms of ongoing support the franchisor will provide to the franchisee. Typically, this would involve things such as providing materials, training and coaching. If the franchisee feels the agreed level of support is not being provided or is not sufficient for their success, then this could lead to a dispute.

For a franchisor, it is important that the level of support the franchisee can expect is transparently laid out at the outset and detailed in the franchise agreement. If additional support is required, a prudent franchisor will have reserved itself the ability to charge for that support.

Disagreements over marketing

Franchisees will typically contribute to a central marketing budget on the basis that suitable advertising and marketing activity will be carried out that benefits their franchise. If the franchisee feels they are not receiving enough of a benefit from the brand’s marketing strategy, they may complain or even withhold their marketing contributions.

For a mature franchisor, they may have a franchisee council that has input (but not decision-making powers) into a marketing strategy. It is important that franchisors hold marketing contributions from franchisees in separate accounts, or at the least provide for an annual audit showing receipts, expenditure and any carry-forward. This is because the High Court has held that marketing contributions are held on a quasi-trust basis.

Disputes over territorial exclusivity

A franchisee will usually be granted the exclusive right to operate units within a particular area. Sometimes, however, disputes can arise over exactly what area is covered by a particular franchise. The franchisor may also wish to amend an existing franchise area to account for factors such as a growing population or new developments, or to reduce an area if the franchisee is not exploiting it fully.

To minimise the risk of such disputes, the franchise area should be clearly defined in the franchise agreement, as should any circumstances that may allow the franchise area to be redrawn by the franchisor. Furthermore, franchisors must be careful in how they describe the ‘exclusive’ right because of rules permitting franchisees to respond to passive enquiries out of area, and potentially within another franchisee’s area.

Misuse of intellectual property

Brands will need to licence key parts of their intellectual property to franchisees e.g. their brand name and logo. The licence agreement should detail exactly how this intellectual property can be used and that it can only be used in the ways specified.

If the franchisor feels a franchisee is using their intellectual property in a way that is not allowed, they will need to take action to protect the integrity of their brand.

Breach of confidentiality

Franchisees will often have access to various trade secrets owned by the parent brand. For this reason, their franchise agreement will typically include a confidentiality clause preventing them from sharing those trade secrets. If there is a suggestion that this duty of confidentiality has been breached by the franchisee, then the franchisor may wish to take action to remedy the situation.

To avoid this type of scenario, both parties should make sure they are absolutely clear what information is covered by the confidentiality agreement and what would constitute a breach of that confidentiality.

Breach of post-termination restrictions

When a franchise ends, the terms of the franchise agreement will normally bar the former franchisee from operating a similar business in the same territory for up to 12 months. If a franchisee breaches this post-termination restriction, they could find themselves facing legal action from the franchisor. Other post-termination restrictions could include things like not doing anything to disparage or otherwise harm the franchisor or parent brand, or soliciting work from former customers.

It is strongly recommended that a former franchisee looking to start a new business takes legal advice on any post-termination restrictions in advance to ensure that they do not leave themselves open to this type of legal risk.

What happens if you break a franchise agreement?

What happens if a franchise agreement is breached will depend on the situation. In some cases, either party may have the right to terminate the agreement if the other side is in breach of their obligations. However, for minor breaches, it may be possible to agree on an amicable resolution that allows the franchise relationship to continue.

Where you suspect a breach may have occurred, it is important to seek expert advice at the earliest opportunity. This can give you the best chance of securing the outcome that you desire, whether that is to terminate the franchise or find a way of keeping it going.

How do you settle a dispute in franchising?

A franchise agreement should contain provision for the franchise dispute resolution procedure to be used in the event of a dispute. Dispute resolution in franchising will typically involve using non-confrontational approaches such as an informal meeting or a franchise mediation to agree on a solution privately, without the need to resort to contentious court proceedings. This is generally in both parties’ best interests as it can allow a dispute to be resolved relatively quickly, with minimal expense and without unnecessary publicity.

If an amicable agreement cannot be reached, franchise litigation via court proceedings may be necessary. If this is the case, it is absolutely vital that your case is constructed on the firmest possible grounds and that you have first-class legal representation.

How IBB Owen White can help with franchise disputes

The Franchising team at IBB Owen White can advise on all aspects of franchise law, including in relation to franchise dispute resolution.

Our expertise has been independently recognised by leading client guides Chambers & Partners and the Legal 500. Our lawyers have strong skills in negotiation and a keen understanding of both the legal and commercial aspects of franchise business models, so can give you the best chance of achieving a positive outcome that fits your wider business requirements.

To discuss how we can help with franchise disputes or any other issues related to franchise law, please contact the Franchising team on 03456 381381 or email enquiries@ibblaw.co.uk to set up a meeting.