Termination of the Franchise agreement: A Complete Guide
Franchisee and franchisor reviewing the franchise agreement and discussing termination of the franchise agreement

Complete Guide on Termination of the Franchise Agreement

Introduction

Franchise Agreements are legally binding agreements. For example, X Ltd. is very famous for its pizza. They will provide their name and recipe to different outlets to grow their businesses and operate in other areas, countries, or worldwide. This arrangement requires the franchisor and franchisee to sign a franchise agreement that secures their rights and liabilities. Following the signing of a franchise agreement, it is essential to determine how to handle the termination of the franchise agreement following the expiration of the franchise agreement or if either party violates it. 

A franchise agreement is a contract between the franchisor and the franchise. However, either party can deny compliance with the terms of the agreement, resulting in the termination of the contract. 

This blog will discuss in detail those conditions in which either party can terminate the agreement. There are inevitable consequences of such termination, such as giving back the rights over intellectual property in more detail. 

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What is a Franchise Agreement?

It is an agreement between two parties known as a franchisor and franchisee. They enter into a contract with a franchisee to give them the right to operate the business and sell and distribute the goods and services in the market.

The franchisee gives consideration to the franchisor, making it a legally binding contract. The process involves a variety of arrangements, such as fees, royalties, rents, etc. Several clauses related to the agreement’s amounts, terms, obligations, and conditions must be adhered to by both parties. 

The agreement comprises of the fundamental provisions, which include:

  1. The location where the business would operate.
  2. Selection of a suitable place for operating the business.
  3. Royalties or fees amount to be paid to the franchisor.
  4. The validity period of the agreement.
  5. Payment for obtaining the trademark of the franchisor.
  6. Details about the training support to be given by the franchisor to the franchisee.
  7. Mode of operation details like standards of the goods or services.
  8. Details about using the logo or trademark.
  9. Details about the terms and payments for advertisements.
  10. The policy of cancellation and termination of the agreement, and
  11. Strategies to be used to exit.

How to Get out of a Franchise Agreement?

The termination clause is included under the Franchise agreement. You can use it to get out of a Franchise Agreement. The termination clause generally states why the agreement can be suspended or terminated by either of the parties. For example, if the other party fails to comply with contractual clauses, the contract is terminated.

A further provision can specify that the agreement will terminate if the other party does not resolve the material breach within a reasonable period.

When Should a Franchise Agreement be Terminated Early?

There is a fixed period of the validity of the agreement. For example, the agreement between X Ltd. and Mr. A will be valid for five years. The agreement will end automatically after five years. After the termination of business, it will cease to exist, or the parties will renew the contract to continue the same arrangement. However, both parties can terminate the agreement and get out of the arrangement even before the validity period expires. If the franchisor wants to terminate the agreement after two years due to some legal issues, he may do so. 

There can be different reasons for the franchise agreement to end early, such as the franchisee is no longer equipped enough to carry out the business or the franchisor thinks that the franchisee’s conditions and standards are not being fulfilled.

What Can Cause the Early Termination of the Franchise Agreement?

Franchisees receive the right to operate a business from the franchisor, who owns the business. Thus they have a lot of say and power while making the terms and conditions of the agreement. The franchisor can terminate the franchise early for a variety of reasons, including:

  1. The Franchisee has been convicted of a crime.
  2. Bankruptcy due to which the business cannot continue.
  3. The franchisee lost the license required to do a specific type of business. For example, a liquor license is required to sell liquor.
  4. The Franchisee failed to pay the amount as agreed in the agreement.
  5. The work of the franchisee is causing danger to public health and safety.
  6. It can also be mutually terminated without a specific reason. 

When Can a Franchisee Terminate a Franchise Agreement?

Generally, the franchisee doesn’t terminate the agreement as he is willing to operate the business with the branch name of the franchisor. Although there are some reasons for which a franchisee can terminate the agreement early, such as:

  1. The franchisor agreed to provide required skills training to the franchisee but failed to do so. Training is necessary to make and sell a specific recipe when the brand is known for its quality and uniqueness. 
  2. The Franchisor has committed fraud or misrepresentation, due to which the franchisee can terminate the agreement.

What Happens When a franchise agreement Expires?

The franchisee has to pay the outstanding amount to owe to the franchisor. The franchisee loses the right to use the franchisor’s intellectual property; thus, they can no longer use the franchisor’s trademark. The logo cannot be operated anymore by the franchisee. It must be removed from all the advertisements and brochures when the franchisor terminates the agreement.  

If the location appears like the franchisor brand, it has to be changed to prevent misuse of identity. Changing the uniform of franchisee employees is necessary since it can confuse the general public. 

It is even necessary to change the recipe for the food provided by the franchisor. For example, the pizza of Company X Ltd. has a secret recipe that the franchisee cannot use after the termination of the franchise agreement.

If the franchisee has taken any equipment or property from the franchisor to carry out business, they must return it to the franchisor.

If there was any non-disclosure agreement between the franchisor and franchisee or confidentiality clause in the franchise agreement, the franchisee should never reveal the trade secrets in the market.

When the termination has happened as a legal consequence and parties are contending that they don’t owe any debt to the other party, that party’s legal representative has to prove the same in court.

The franchisee must keep and respect the non-compete clause after termination. In other words, the franchisee cannot run a competing business with the franchisor. There are specific duties that a franchisee has after the termination of the contract, such as acting in good faith.

Conclusion

The franchise agreement helps the franchisor and franchisee to define the mode of operation that would take place between them post the agreement. A contract restricts the parties’ conduct prior to, during, and after the termination of the contract and imposes penalties on any party who violates it. Thus the parties must take legal advice from a skilled and expert attorney to make a good franchise agreement.

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