Sometimes, a franchise relationship will turn sour before the binding term of the agreement expires. The franchise product or service may have become outdated. Or the franchise model is simply no longer producing a profit for one or both of the parties.

Alternatively, one party may have lost faith in the other performing their side of the bargain or a dispute may have arisen as to the parties’ respective rights and obligations.

If you find yourself in this unfortunate situation, you should first consider the following before officially cutting ties. A failure to adhere to the proper system for termination or compliance with the dispute resolution procedure prescribed in the Franchising Code of Conduct could see you liable for a lot more than just your bad business debt.

1. The terms of the franchise agreement 

The franchise agreement itself will dictate when, and how, either party to the agreement may terminate. Usually, such a right as afforded to a franchisee is limited, and there is no right to terminate ‘at-will’.

Furthermore, the franchise agreement will also set out the obligations of the parties at termination (including circumstances where the franchise business is abandoned), which, for the franchisee, can include payment of the franchisor's legal fees. 

2. Obligation of good faith

Much has been said about the statutory obligation of good faith as it applies in the context of the franchise relationship. Both franchisors and franchisees now have a legal requirement to consider each other's commercial interests.

So, if your issues arise from an operational issue or something that could be fixed with a few tweaks to the model, it's worthwhile raising the problem in writing with the franchisor.  You can then maintain a record of your issues and requests to rectify them. 

3. Application of the Franchising Code of Conduct

The Code is very prescriptive as to how parties should address breaches or handle disputes. Sometimes, the best way of negotiating an exit to a franchise agreement is to evoke that procedure (provided you have the necessary grounds to do so) which will, in effect, force the other party to the table for the purpose of negotiations.

Failure to adhere to these prescribed systems, on the other hand, can result in you breaching the Code and, ultimately, liable for any resultant damage, and potential fines.

4. Pre-contractual warranties 

The Code now prescribes that franchisors can not seek to avoid any pre-contractual warranties made.

So if you were promised certain things during these negotiations and they have not eventuated, it would be worthwhile exploring whether you can rely on a breach of pre-contractual negotiations to leverage an exit from the franchise.

Noting the above, the worst possible thing you can do is simply to walk away or shut up shop. If you want to cut ties with the franchisor, you should consult a franchise lawyer who will be able to advise you on your rights and guide you through the process.

By Emma Jervis – LegalVIsion Principal and Franchise Lawyer