Franchise disputes

Disputes and termination

It is essential for every franchisor to enforce the obligations of subfranchisors, developers and franchisees to observe franchise standards. In an international franchise system enforcement overseas is far more problematic than a purely domestic forum. The risk of non-compliance and the consequential damage to the entire system will increase when the franchisor decides to take its franchise system overseas.

If a sub-franchisor, developer or franchisee is in breach of its commitments to the franchisor enforcement action should be taken quickly as failure to do so may encourage other sub-franchisors, developers and franchisees to breach their commitments. If this were to happen the universal image and goodwill in the system will be in danger of collapse.

Likely causes of dispute

The parties

The threat to the franchisor's system may arise from either breaches by a franchisee or the actions of a third party who may, for example, challenge the intellectual property rights of the franchise system.

Franchisor and franchisee

The sort of disputes which frequently arise are often the result of a sub-franchisor/developer/franchisee's:

(a) failure to make payments due

(b) failure to maintain proper financial control in order to provide an accurate account of gross income and monies due

(c) failure to maintain adequate quality control, poor training of staff and service;

(d) a breach of confidentiality provisions

(e) failure to display the name and/or logo adequately

(f) failure to comply with non-competition provisions.

Disputes may also be initiated by sub-franchisors, developers and franchisees who are seeking legal excuses for non-compliance, for example, alleging unfair trade practices, breach of anti-trust laws or oppressive operational standards.

The franchisee and third party

Sub-franchisors/developers/franchisees must take enforcement action against third parties operating outside the franchise system, and infringing the franchisor's intellectual property rights, such as its name, trade marks, copyright and patents. The sub-franchisor/developer/franchisee must be obliged to take effective enforcement action against any threat to the system's intellectual property rights. However, in the absence of the sub-franchisor/developer/franchisee taking action, it is essential that the franchisor itself reserves the right to sue the infringing party.