Following the February 2011 collapse of Redgroup Retail and its book retailing outlets Borders and Angus & Robertson, it was reported that a group of Angus & Robertson franchisees chose to terminate their franchise agreements on the basis of alleged breaches of those agreements by Angus & Robertson.

Although it has since been reported that the same group of franchisees may have resolved their differences with the administrator of Redgroup Retail, the action taken by these franchisees highlights the issue of when a franchisee can terminate a franchise agreement.

Breach of contract

With the exception of cooling-off provisions, it is extremely rare to find clauses in a franchise agreement that give a franchisee a contractual right to terminate the agreement. However, the absence of such clauses does not mean that franchisees will never have a legal right to terminate a franchise agreement.

The common law says that if there is a breach of a term of a contract (or an anticipated breach of that term) that goes to the root of the contract, the innocent party may elect to terminate the contract.

Terms which go to the root of a contract are sometimes called essential terms. They are terms which are of such importance that the person would not have signed the contract without their inclusion.

So what are the essential terms of franchise agreements?

There is no definitive answer to this question as it will be different for each franchise agreement. However, applying the above test, it would seem the following standard obligations imposed on franchisors could be considered essential terms:

• Allowing the franchisee to operate under the relevant brands and trademarks;
• Providing the franchisee with the necessary tools to operate the franchised business, such as manuals and initial training; and
• If there is a marketing fund, utilising that fund in a manner beneficial to the network.

Franchisees should not assume that the fact a franchisor has gone into voluntary administration (or some other form of external administration) gives them the right to terminate their franchise agreement. The franchisor company still exists and, provided it is performing its essential obligations under the franchise agreement (under the control of the external administrator), no right to terminate will exist.

Exercise the right

It is also important to note a common law right to terminate a contract must be exercised as soon as possible. If a franchisee who considers there has been a breach of an essential term chooses not to exercise the right to terminate the franchise agreement and, through words or conduct, indicates they want to continue with the franchise agreement, they may lose their right to terminate.

Such words or conduct would be considered an affirmation of the franchise agreement. In these circumstances, whilst the right to terminate the franchise agreement will be lost, a right to seek compensation for the breach will remain.

The most difficult task facing franchisees who want to terminate a franchise agreement because of a breach by a franchisor, is determining whether the term breached is an essential term. A franchisee should always seek advice from experienced lawyers before exercising such a right because if they terminate the franchise agreement where there is no legal right, it will be the franchisee who will be facing a breach of contract claim from the franchisor.