Franchise agreement termination is a complex area. In this article we look at the options available to franchisors and franchisees who want to exit a franchise agreement early.
Under the terms of a franchise agreement, a franchisee is given the right to operate the franchise business for a period of time. When the time period expires, the franchise agreement "expires". [What is a Franchise Agreement?]
A franchisor may terminate a franchise agreement early (that is, before the franchise agreement expires), if the franchisor follows the procedures set out in the franchise agreement and the Franchising Code of Conduct (the Franchising Code). [What is the Franchising Code of Conduct?]
If a franchise agreement contains provisions allowing a franchisee to terminate the franchise agreement, a franchisee may terminate a franchise agreement early if the franchisee follows the provisions set out in the franchise agreement.
There are also limited circumstances where a franchisor or franchisee can terminate a franchise agreement at common law. We have not dealt with these circumstances in this article.
Termination Under the Franchising Code of Conduct
Termination Clauses in Franchise Agreements
Legal Procedures for Terminating A Franchise Agreement
Franchising in Australia is governed by the Franchising Code.
While a franchise agreement sets out the terms agreed between the franchisor and the franchisee, the terms of the franchise agreement must also comply with the Franchising Code.
Historically, franchise agreements have allowed the franchisor (but not the franchisee) to terminate the franchise agreement early. Consequently the Franchising Code introduced some safeguards for franchisees when it comes to franchise agreement termination.
If a franchisor attempts to terminate a franchise agreement in a way that is not allowed by the Franchising Code, the termination will not be valid.
Division 5 of the Franchising Code details the parties' obligations in relation to the termination of a franchise agreement.
Clause 26 of the Franchising Code sets out a number of ways that a franchisee may be able to terminate a franchise agreement, including:
Clause 27 of the Franchising Code sets out the process that a franchisor must follow if the franchisor wishes to terminate the franchise agreement early, on the basis that the franchisee has breached a term or terms of the franchise agreement.
Briefly, under clause 27 of the Franchising Code a franchisor must:
Clause 28 of the Franchising Code allows a franchisor to terminate a franchise agreement if:
Under clause 28(3) of the Franchising Code before terminating the franchise agreement, the franchisor must give the franchisee reasonable written notice of the proposed termination and the reasons for it.
Clause 29 of the Franchising Code details the process that a franchisor must follow to terminate a franchise agreement on one of the particular grounds set out in clause 29. The particular grounds include:
For franchise agreements entered into after July 2021, the franchisor must provide 7 days written notice to the franchisee, if the franchisor wishes to terminate a franchise agreement in one of the circumstances set out above.
In addition, for franchise agreements entered into after July 2021, if the franchisee disputes the grounds of the proposed termination, the franchisee may notify the franchisor of the dispute and commence the dispute resolution process (clause 29(4) Franchising Code).
If there is a dispute raised, the franchisor cannot terminate the franchise agreement until after the end of 28 days from the provision of the proposed termination notice.**
For franchise agreements entered into before July 2021, clause 29 of the Franchising Code of Conduct in force from 1 June 2020 applies (the Previous Franchising Code). Clause 29 of the Previous Franchising Code allows a franchise agreement to be terminated immediately in special circumstances. The special circumstances set out in clause 29 of the Previous Franchising Code are similar to the "particular grounds" set out above.
In addition to the Franchising Code, in order to be able to terminate a franchise agreement early, the franchise agreement must contain a clause that allows either the franchisor or the franchisee to terminate the franchise agreement early.
A breach of a franchise agreement occurs when one party to the franchise agreement fails to perform their obligations under the franchise agreement without a lawful excuse.
Franchise agreements will generally include a clause which allows a franchisor to terminate the franchise agreement if:
It is rare to find a franchise agreement which allows a franchisee to terminate the franchise agreement for a minor breach of the franchise agreement by the franchisor.
Some franchise agreements, may include a clause that allows a franchisee to terminate the franchise agreement if:
Some franchise agreements include a clause or clauses that allow the franchisor to terminate the franchise agreement even if the franchisee hasn't breached the franchise agreement.
For example, a franchise agreement may provide that the franchisor can terminate the franchise agreement if the franchisee does not complete initial training to the satisfaction of the franchisor.
These type of termination clauses are subject to clause 28 of the Franchising Code and consequently, a franchisor must give reasonable written notice of the proposed termination and the reasons for it to the franchisee.
Some franchise agreements provide that the franchisor can terminate the franchise agreement by giving the franchisee a reasonable period of notice (for example the franchisor can terminate the franchise agreement at any time on three months' notice). It is our view that if the franchisee does not have a similar right under the terms of the franchise agreement, it is likely that these type of termination terms will be unfair. Consequently, if the franchise agreement is a standard form contract, [What is a standard form contract?], then the unfair contract terms regime is likely to apply [What are unfair contract terms?].
Generally franchise agreements include a clause which allows the franchisor to terminate the franchise agreement for the particular grounds set out in clause 29 of the Franchising Code (we have set these grounds out above).
These type of termination clauses are subject to clause 29 of the Franchising Code. The process that a franchisor is required to follow if terminating a franchise agreement under this type of clause will depend on when the franchise agreement was entered into.
A franchise agreement will contain clauses that allow both the franchisee and the franchisor to cool off after the franchise agreement is entered into.
A franchisee's rights to 'cool off' will be subject to the franchisee's cooling off rights set out in clause 26 of the Franchising Code.
Terminating a franchise agreement involves following specific legal procedures. The exact procedures may vary depending on the terms outlined in the franchise agreement and the provisions of the Franchising Code.
Some common legal procedures for terminating a franchise agreement include:
If a franchisor proposes to terminate the franchise agreement as a result of a breach of the franchise agreement by a franchisee, the franchisor must first issue a valid notice to remedy breach.
In most cases, the franchise agreement will allow for a cure period, during which the franchisee has the opportunity to remedy the breach or non-compliance. Under the terms of the Franchising Code, the cure period must be "reasonable". Clause 27(3) of the Franchising Code provides that a franchisor does not have to allow a franchisee more than 30 days to remedy the breach.
If the franchisee does not remedy the breach, the franchisor may then issue a termination notice.
If a franchise agreement includes a term allowing a franchisee to terminate the franchise agreement for breach by the franchisor, and a franchisee proposes to terminate the franchise agreement, the franchisee must issue a valid notice to remedy breach.
The franchise agreement should set out the period during which the franchisor has the opportunity to remedy the breach.
If the franchisor does not remedy the breach, the franchisee may then issue a termination notice.
If either a franchisor or a franchisee proposes to terminate a franchise agreement, they must provide written notice to the other party, stating the reasons for termination and the effective date.
If disputes arise during the termination process, the parties may choose to engage in mediation or conciliation to resolve the issues.
The alternative dispute resolution process is particularly important if a franchisor proposes to terminate a franchise agreement under clause 29 of the Franchising Code. If a franchise agreement was entered into after July 2021 and the franchisor proposes to terminate the franchise agreement under clause 29 of the Franchising Code, then if the franchisee commences the dispute resolution process set out in clause 40A of the Franchising Code, the franchisor is not able to terminate the franchise agreement for a period of 28 days.
For a further discussion about the current alternative dispute resolution process under the Franchising Code, see our article Franchising Code Amendments - Dispute Resolution.
Understanding the termination clauses detailed in the Franchising Code is important for both franchisors and franchisees.
By following the specific legal procedures and requirements, parties can navigate the process of terminating a franchise agreement effectively.
Whether it involves issuing a valid notice to remedy breach, providing written notice of termination, or engaging in alternative dispute resolution, adherence to these steps is essential.
**As a result of the complexity of the termination process after July 2021, the 2023 Independent Review of the Franchising Code has recommended that the termination process under the Franchising Code be simplified. The federal government has agreed in principle to do so.
Disclaimer
The information in this article is general in nature and is not intended to address the circumstances of any person or other entity. Although we do our best to provide timely and accurate information, we do not guarantee that the information in this article is accurate or that it will continue to be accurate in the future.