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How franchisees can minimise legal costs and succeed in a franchise dispute.

Updated: May 16, 2023


Happy franchisees

Franchising can be a great way to get into business but if you join a bad franchise, it can be a nightmare. The good news is that it is frequently possible to gain control, receive compensation and leave without a huge legal bill.


Almost every situation is different. In some cases, the franchisor has made false statements during the recruitment process and is guilty of misrepresentation. In others the franchisor has failed to comply with all their responsibilities in the franchise agreement. We have seen cases in which a franchisor misappropriated some of the advertising revenue that they had collected from the franchisees. We have seen illicit kickbacks from nominated suppliers of products and services to the franchisees. Shoddy administration of territories is a common problem, as is, lack of support. New recruits have been known to receive insufficient and badly organised training. The operations manual has sometimes not been fit for purpose because it hadn’t been kept up to date. New branch openings are often mishandled. The list goes on.

franchisees complaining to franchisor

When a franchisee raises concerns, franchisors usually try to get rid of the problem by offering more support. That doesn’t address the underlying problem and is nearly always ineffective. When that process has been repeated a number of times without success the relationship breaks down and the franchisee is viewed as a troublesome complainer who isn’t trying hard enough.


A franchisee who asks to leave is normally told that the cost of being released from the franchise agreement will be all the money that the franchisor would have received in management charges from the franchisee, until the expiry date. Without exception, franchisors will insist on enforcing all the post-termination clauses in the agreement. For a franchisee who is running low on cash and who sees no way out of the situation this is all very stressful and challenging. To make matters worse, even a cursory investigation will confirm that consulting a solicitor and launching a legal action would be expensive and time-consuming. On top of that the franchisor has far greater financial resources and already has a specialist solicitor.

 

So, what can be done for franchisees?


The first thing for a franchisee to do is appreciate that franchisors want happy, compliant franchisees and stable networks. They want to avoid litigation but if it is forced on them, they prefer to fight than reach settlements that could set precedents that could encourage more claims from other franchisees. A franchisee should therefore make a personal approach to the franchisor stating their position and their desired outcome. Claims of misrepresentation, lack of support or mismanagement of the franchise should be supported by evidence. To avoid the opposing positions becoming entrenched, criticisms should be as impersonal as possible.


It is fairly certain that the initial response will be a denial of responsibility and will probably take a number of exchanges of emails or letters before the franchisor accepts that it is in their interests to negotiate a settlement. At this stage it may be necessary to appoint a specialist franchise solicitor to formalise the claim and emphasise that it represents a serious threat for the franchisor. If sufficient preparatory work such as gathering evidence has been done the cost of the solicitor can be kept to a minimum.


The objective, at all times, is to convince the franchisor that the case against them is strong and well-documented. Also, that the franchisee has the financial resources and determination to commence litigation if a negotiated settlement cannot be reached.


A sensible franchisor will understand that a franchisee who has a credible complaint and strong supporting evidence could cause immense damage to their business in a public court hearing. If a judge decided in the franchisee’s favour the financial cost, including the franchisee’s legal costs as well as their own, would be enormous. Other franchisees, with similar problems, would be emboldened by the success of their fellow franchisee and might also bring claims. A class action could be started.

franchisee with stress

It is important for the franchisee to avoid the possibility of a counterclaim by the franchisor because this would provide negotiating leverage against them. Most franchise agreements contain a clause to prevent the franchisee from doing anything that would be against the interests of the franchisor or would damage the brand. That would include lobbying or encouraging other franchisees to join the dispute. Prematurely starting a competing business would almost certainly cause the franchisor to abandon any form of negotiation and commence litigation. Under-declaration of sales and failing to follow the prescribed business model are also things that the franchisee should be careful of avoiding.


If the franchisee’s case is strong it should be possible to achieve a negotiated settlement. If the franchisor is intractable and refuses to accept any responsibility for what has happened the franchisee may have to consider commencing litigation. However, because the courts encourage mediation, that may not necessarily involve the cost of a full trial.


A mediation is far less expensive than a trial and the success rate is high. The mediator’s role is to encourage a negotiated settlement rather than to pass any form of judgement. A key objective is to help both parties understand the reality of the situation and the risks that they face by continuing to a full court hearing. If the franchisee’s case is convincing it is likely that the mediator will be able to help the franchisor to make the right decision and settle all or a large part of the claim.

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