💡Key Insight
- The most common reasons for terminating a franchise agreement include exercising the statutory cooling-off right shortly after signing, termination options expressly set out in the agreement (such as insolvency or exit clauses), and breaches of fundamental contractual obligations by franchisors or franchisees that justify ending the relationship early.
- Termination before expiry is not automatic under Australian franchise law and often depends on specific contract terms like cooling-off periods or exit provisions.
- A breach of the franchise agreement, such as failure to pay royalties or comply with operational standards, is a frequent legal basis for termination because it undermines the contractual relationship and can trigger termination rights for the non-breaching party.
- Termination due to insolvency or business failure is common because franchisees who become insolvent lose the legal and financial capacity to operate under the franchise brand, creating legal grounds for ending the contract.
- Understanding the termination provisions in a franchise agreement is critical for franchisees and franchisors because they define when and how the agreement can legally end, and professional legal advice is often recommended to navigate these complex clauses.
The concept of franchising has become a popular method of business trading. The ability of a business to assign independent people their goods and services for trade has subsequently brought contractual issues between the parties. In particular, termination of a franchise agreement has been frequently disputed. This article will detail what the most common reasons for terminating a franchise agreement.
What is a Franchise Agreement?
A franchise agreement is a legally enforceable contract between the franchisor and the franchisee. Each agreement contains clauses which details when, how and who can terminate the agreement.
In brief, a franchise agreement can end in two different ways:
- Expiry of the term with non-renewal
- Termination before the end of the agreement
Expiry of the term with non-renewal is a straightforward concept. That is, the agreed term for the business relationship has ended and does not continue. However, termination before the agreed date often occurs due to a number of reasons.
Here are three most common reasons for terminating a franchise agreement before the agreed date:
Cooling Off Period
The cooling off period occurs when a franchisee terminates an agreement within 7 days after entering into the agreement or making any payments. This period is valid under the Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (Cth). However, this option can only be exercised for entirely new franchise agreements. Therefore, termination of franchise agreements will not be possible if they have been renewed or transferred.
Termination through Terms and Conditions in the Franchise Agreement
It is important that you are aware that a franchise agreement may contain clauses with a termination option and the procedures for termination. Although many franchise agreements do not contain such clauses, terms and conditions of this agreement can stipulate that valid circumstances can render the agreement to come to an end. For example, a valid act for termination can be when the franchise businesses become insolvent. This would mean that the franchisee loses its right to trade under the franchisor’s brand name, lose the right for occupation and maintain liability to current suppliers. Termination through terms and conditions of a franchise agreement can get tricky as special circumstances can change quickly.
Therefore, it is recommended that you consult a lawyer to clarify your rights and responsibilities.
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Breach in Terms and Conditions of a Franchise Agreement
A breach in the agreement is one of the most common reasons that a franchise agreement terminates. Put simply, if either parties break one of the agreed conditions, the franchisor may terminate the agreement. For example, a franchise agreement for a business states that a business must pay a monthly percentage of profits to the franchisor. In instances where the franchisee does not comply, the franchisor may terminate the agreement based on a breach of action.
Final Thoughts
In conclusion, the termination of a franchise agreement is subject to a number of different factors. It is important that you are able to distinguish where your rights and obligations lie. Thus, it is recommended that a Heads of Agreement document will be beneficial in avoiding legal liability.
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