FRANCHISE BREACH NOTICE

Franchise Breach Notices 

• you have breached a clause of the franchise agreement;
• the franchisor has notified you in writing that you have breached the franchise agreement ("the Franchise Breach Notice");
• the franchisor has given you a reasonable time period to remedy the breach;
• you have failed or refused to remedy the breach.

The ACCC reported in its guide "Unfair contract terms in franchise agreements" that 9 out of 10 of the franchise agreements that it reviewed in 2023 included a clause that enabled a franchisor to terminate the franchise agreement for a breach of the franchise agreement (regardless of whether the breach was material or minor).

 

In this Guide:

What is a breach of a franchise agreement?

What is a franchise breach notice?

What must a franchise breach notice contain?

What is a reasonable time to allow a franchisee to remedy a breach?

What common mistakes are made by franchisors when issuing a breach notice?

What do I do if I receive a franchise breach notice?

Does a franchisor have to act in good faith when issuing a breach notice?

 

 

What is a breach of a franchise agreement?

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. Given that franchise agreements are generally written so that the obligations fall on the franchisee, it is likely that a franchisee will breach their franchise agreement at some point during the term of the franchise.

Breaches can be categorised into four main types:

1. Minor breach: a minor breach of a franchise agreement by a franchisee occurs when the franchisor still receives the substantial benefit of the franchise agreement. An example of a minor breach of a franchise agreement would be the failure of the franchisee to wear the uniform prescribed by the franchisor.
2. Material Breach: a material breach of a franchise agreement by a franchisee occurs when the breach is significant and it has a substantial impact on the benefit that the franchisor receives under the contract. An example of a material breach of a franchise agreement might be a substantial failure of a franchisee to pay franchise fees.
3. Fundamental Breach: a fundamental breach of a franchise agreement is more severe than a material breach. An example of a fundamental breach might be a franchisee de-badging or ceasing to operate the business under the franchisor's brand.
4. Anticipatory Breach: an anticipatory breach of a franchise agreement by a franchisee occurs when the franchisee indicates to the franchisor in advance that they will not be performing their obligations under the franchise agreement when they fall due.

 

 

What is a franchise breach notice?

A franchise breach notice is a formal written document issued by a franchisor to a franchisee, stating that the franchisee has breached one or more terms of the franchise agreement [What is a franchise agreement?].

This document serves as an initial step in addressing the breach, outlining the specific areas where the franchisee has failed to comply with the terms of the franchise agreement. A franchise breach notice will provide the franchisee with an opportunity to rectify the identified issues within a specified timeframe to avoid further legal action or the potential termination of the franchise agreement.

 

 

What must a franchise breach notice contain?

If a franchisee has breached the franchise agreement, and termination for that breach is not otherwise governed under the relevant Franchising Code of Conduct (the Franchising Code), the franchisor must give the franchisee a written notice of their breach containing the following information:

• the franchisor proposes to terminate the franchise agreement because of the breach if it is not remedied;

• the things that the franchise requires to be done to remedy the breach;

• the time within which the franchisor requires the breach be remedied.

This time must be reasonable, but need not be more than 30 days after the date of the notice.

The franchisor cannot terminate the franchise agreement if the breach is remedied as required by the franchise breach notice.

 

 

What is a reasonable time to allow a franchisee to remedy a breach?

The Franchising Code provides that a franchisor does not have to allow more than 30 days for a franchisee to remedy the breach.

While the wording of the Franchising Code suggests that 30 days is the maximum amount of time that needs to be given, in practice Courts have found that franchisors who have given franchisees less than 30 days to remedy a breach have not met the reasonable time requirement (see e.g. Delahunt v Swim Loops Pty Ltd [2018] VSC 269). 

Factors to be taken into account in assessing whether any period is reasonable include:

• the type of breach;
• whether the franchisee has previously received a notice for the type of breach;
• if the breach relates to outstanding monies, whether the franchisee has been given time to pay the outstanding monies before the issuing of the notice.

 

 

What common mistakes are made by franchisors when issuing a breach notice?

Common mistakes that franchisors make when issuing Breach Notices include:

• the franchisor fails to explain what the breach is that they claim has occurred in a way that is clear and unambiguous (Catley v Watson (1983) V ConVR);

• the franchisor fails to include options for a franchisee to remedy the breach before the franchisor attempts to terminate the agreement;

• the franchisor fails to provide a reasonable time for the franchisee to remedy the breach.

 

 

What do I do if I receive a franchise breach notice?

If you have received a franchise breach notice you should seek advice from an experienced franchise lawyer as soon as possible.

If you have received a franchise breach notice which provides that you must remedy the breach in a period which is less than 30 days, you should first check the provisions of your franchise agreement to see what the specified period under the franchise agreement is.

If the specified period under the franchise agreement is less than 30 days, or the franchise agreement picks up the wording of the Franchising Code that the “franchisor does not have to allow more than 30 days” (and the Franchise Breach Notice complies with the franchise agreement), then a consideration will need to be undertaken of whether the relevant period is reasonable.

While not all franchise breach notices are valid, if a franchise breach notice is valid there may be serious consequences if you do not comply with the notice.

For example, if  a franchise breach notice is valid and the breach is not remedied within the time required by the franchise breach notice, then the franchisor may terminate the franchise agreement.

 

 

Does a franchisor have to act in good faith when issuing a breach notice?

Yes a franchisor has to act in good faith when issuing a breach notice. When issuing a breach notice, a franchisor should have a genuine basis for alleging the breach and should not use the notice for an improper purpose.

Franchise breach notices should not be issued for minor or inconsequential breaches of the franchise agreement.

Section 18 of the Franchising Code provides that each party to a franchise agreement must act towards another party in good faith.

Whether the issuing of a franchise breach notice or a purported termination of a franchise based on a franchise breach notice is a breach of the requirement to act in good faith will depend on the circumstances of each case.

 

 

For more information about the termination of a franchise agreement see our blogs  Understanding Franchise Agreement Termination and Consequences of Terminating A Franchise Agreement.

 

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.