What Happens When a Franchisee Breaches a Contract?

Expansion to different parts of the nation and the world shows that a company is growing. Such developments are sometimes called "franchises."

Franchising refers to a type of business development where you give others the right to sell a product or operate a business under your firm's name. The individual or firm authorized to use your company’s name is known as a “franchisee” while you are the “franchisor.” A franchisee must pay a franchise fee for the right to sell their products or services under your company’s identity. 

The franchisee must also pay a percentage of their profit to the franchisor—the payment comes as a royalty. Shell and McDonald's are typical examples of franchising firms. You can operate your business under these companies while you pay them franchise fees. 

The Franchise Agreement

Beyond paying franchise fees and royalties, franchisors and franchisees often sign numerous contracts to outline each other's roles and rights clearly. Usually, the US federal agency that oversees franchises, the Federal Trade Commission (FTC), and the region where the business intends to operate determine the documents the parties involved in a franchise will sign. 

The contracts will capture essential issues like lease agreements, loans to construct the franchise location, pay workers' wages, or make modifications. The contracts ensure both parties can work amicably and make a profit. 

A franchise agreement is an official document that authorizes a franchisee to work under the franchise of an established business. The franchise agreement is otherwise called a "franchise agreement." 

What Do You Do If a Franchisee Violates a Franchise Agreement?

Any franchisee that violates a Franchise agreement will face dire consequences, such as losing their franchise and paying damages to the franchisor. 

Most franchisors perform annual audits to know their financial status. However, audits conducted when the franchisee wants to renew their franchise agreements or sell the franchise are often prone to conflicts. Such audits may be a financial or thorough inspection of the business and its operating principles. 

During the inspection, if the franchisor discovers that the franchisee has been flouting the franchise agreement during the review, the franchisor may have the right to terminate the contract. Gross violation of the licensing deal means you cannot trust the franchisee and, without necessary steps, can tarnish the integrity of the franchisor. Hence, terminating the entire agreement is a reliable way to protect your company’s name. 

Cases of Franchisor Liability

Our discourse will be incomplete without highlighting ways a franchisor can violate an agreement because we have witnessed such cases. You can hold a franchisor liable if they do not comply with the FTC. 

The Federal Trade Commission (FTC) requires a franchisor to show vital documents like their litigation history to the franchisee. However, suppose a franchisor hides such documents. In that case, the federal agency could freeze the company's assets, enter injunctions, and treat the breach as a criminal offense, with penalties of up to $10,000 daily. 

The FTC can also complicate matters for the erring franchisor by awarding punitive damages, attorney's fees, and monetary damages to the franchisee or even terminating the agreement and ordering a full refund. Hence, as a franchisor, writing "no history of litigation or legal battle since establishment" is dangerous even if you have settled the case. You must disclose everything to the prospective franchisee. 

“Hiring an experienced, knowledgeable, and reputable business lawyer to handle the franchising documents for you is your surest way to help prevent problems,” says Attorney Jason W. Power of  FranchiseLaw.