Breach of contract notice - How to respond

Franchises offer entrepreneurs the chance to be part of a tried and tested business model without taking some of the risks associated with starting an independent business from scratch. They’ll hand over the rights to use their brand identity and product range, and benefit from their existing customer pool in return for a predetermined fee.

It’s essential that franchisees work to maintain consistency across the business’ network by adhering to the franchisor’s guidelines. But the franchisor is also responsible for making sure the franchisee is fully equipped to run their business successfully. The guidelines for the franchise structure are set out in the franchise agreement, which must be signed by both parties. But what happens if either party breaches it during the contract term?

>> Read more:

• What is the Franchise Agreement?
• Understanding Franchising Law: Top 5 Issues to Consider
• Franchise Lawyers: The Importance Of Consulting A Specialist Franchise Solicitor
• Franchise agreements and the law

Well, both the franchisor and franchisee are within their rights to issue a notice, particularly if the breaches affect the franchise system. Unless you’re a particularly careless businessperson, you won’t expect it to happen to you – no one does. However, you should always be prepared for a franchise breach. This means having all the relevant franchise information to hand, just in case a breach occurs.

If you've signed a franchise agreement, it's essential that you understand how to raise a breach notice as well as how to respond to one. This article should give you a little extra information about why breaches occur and how you can resolve them.

Are there any franchise-related laws in the UK?

There are currently no statutory regulations that govern franchise businesses in the UK. However, as franchisors and franchisees enter into franchise agreements to formalise the relationship, contract law tends to be applied in the event of any issues arising. This is why it’s so important to consult a solicitor that specialises in franchising before you sign on the dotted line.

Does the British Franchise Association (bfa) have any legal influence?

Because the bfa is a voluntary, self-regulatory body for the UK franchise industry, it does not hold any legal authority. But it does have the Code of Ethical Conduct. All members of the bfa are expected to comply with the code, and although it is not legally enforceable, it does set standards and guidelines for franchisors and franchisees to follow throughout their contract terms. These principles are particularly relevant in the event of a breach.

Examples of breaches issued by franchisors

There are many reasons why a franchisor could issue a notice for breach of the franchise agreement. Here are some examples of situations in which a franchisee may violate the contract:

• They don’t start trading by a specific date
• Their employees don’t undertake the required training
• They don’t meet the expected performance levels
• They fail to make the required payments due under the agreement
• They provide false or misleading information
• They consistently offer poor quality service that results in customer complaints
• They damage the franchise’s reputation
• They sell or walk away from the franchise without adhering to the standards outlined in the agreement

How franchisors issue a breach notice

The bfa’s Code of Conduct sets clear guidelines for the requirements of a breach notice. Franchisors must make sure they:

• Make the franchisee aware of their intention to terminate the franchise agreement as a result of the violation
• Explain how the franchisee can remedy the breach
• Allow a reasonable period for the franchisee to put things right (this does not have to exceed 30 days)

Although these guidelines are designed for franchisors, franchisees should also follow the same steps if they believe their franchisor has violated the franchise contract.

How franchisees should respond to a breach notice

Naturally, being on the receiving end of a breach notice can be worrying. You’ll want to make sure your relationship with the franchisor is not impacted, so it’s best to deal with the situation effectively and efficiently.

Here are some tips on how to respond:

• Act promptly – Whether you agree or disagree with the breaches outlined in the notice, it's important to respond as soon as possible. If you wish to dispute the claims, you’ll need to provide reasoning as to why you're challenging the violation. You may wish to seek professional advice from a specialist franchise solicitor too.
• Review the proposed steps to remedy the breach – In the breach notice, the franchisor should detail the measures they expect you to take in order to remedy the situation. Make sure you review these carefully to ascertain if the proposed steps are achievable. If they are, you should aim to complete the steps within the specified period. If, however, you oppose the breach or find the steps to be unreasonable, you will need to respond to the franchisor explaining why you won’t be taking any action.
• Be open and honest – You may need to explain how and why the breach occurred. To safeguard your relationship with the franchisor, it’s recommended that you provide some context regarding the breach. This will allow the franchisor to gain a better understanding of how your franchise is run. It’s also an excellent opportunity to discuss any issues with the franchise system openly and honestly. Done in the right way, this dialogue can build a relationship of trust with the franchisor.
• Stay composed – It’s not nice to be at the receiving end of a breach notice. But you should remember that the franchisor is just defending the reputation and consistency of their brand, from which you ultimately benefit. If there is a reasonable explanation for the breach or the issue can easily be rectified, there is no need to react negatively to the situation. The best way to deal with a breach is to stay calm and keep your integrity.

Possible outcomes of a franchise’s breach notice

• Damages. One of the most common outcomes of a breach of contract is the payment of damages. This is when money is paid to the other party to compensate them for the money they’ve lost as a result of your behaviour. Of course, this can only offset financial losses; emotional distress is much harder to resolve. The amount to be paid will be decided in court once the injured party has demonstrated that they have suffered a loss.
• Liquidated damages. Also a form of monetary compensation, liquidated damages should cover the capital lost as a result of the breach. However, this type of damages is decided as a set number when the franchise agreement is signed, saving a complex court battle.
• Specific performance. This is when the court orders the person who has breached the contract to perform a specific task in order to rectify the issue.
• Injunction. This court order requires the person at fault to stop doing something.
• Account of profits. In this instance, one party pays the other the amount they would have made in profits, had the breach never occurred.
• Rescission. This is a fairly uncommon outcome and it involves the court reversing the entire franchise contract. By the end of the process, both parties should be back in the position they were in before they signed the agreement.
• Alternative dispute resolution (ADR). This is an alternative to court proceedings and is becoming increasingly common in franchise breach scenarios. It enables the parties to try to resolve the issues that have arisen by discussing them through a mediator or arbitrator of their choice. This means the dispute remains private, as it is not discussed in an open court.It is also beneficial if the issue is particularly technical, as you can find a go-between with specialist knowledge who will be able to get a fuller picture of the dispute. If a mediator is appointed, they will reach a resolution that both parties can agree to. Arbitrators aren’t so interested in compromises. They’ll side with one of the parties, which is more in line with court action.
• Contract termination. In the most extreme cases, the injured party may want to terminate the contract. Usually, both parties will adhere to the termination clauses in the franchise agreement, but in the worst-case scenario, the franchisee leaves the business without resolving the breach issues. This can only happen when the innocent party chooses to end the contract, and can only happen in very serious situations.

What to do if the franchisor breaches the franchise agreement

Franchise agreements are prepared by the franchisor and tend to be heavily weighted in their favour. This means that the rules and obligations expected of the franchisor are far less than those the franchisee must adhere to. However, if you feel that the franchisor has failed to observe an essential condition of the contract, you're justified in issuing a breach.

The types of breaches that a franchisor may be guilty of include failing to offer adequate training and support or an operations manual. All these elements are crucial to the success of a franchise system and, if they're absent, you're within your rights to request that the franchise agreement is terminated.