Franchise Breach Notices and Franchise Agreements
Franchise agreements will generally include a clause which allows a franchisor to terminate the franchise agreement if
- 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).
What is a breach of a franchise agreement?
What is a franchise breach notice?
What to do if you receive a franchise breach notice
Franchise breach notice requirements
What is a reasonable cure period for a franchise breach notice?
Good faith and franchise breach notices
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:
- 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.
- 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.
- 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.
- 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 to do if you 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.
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.
Franchise breach notice requirements
A franchise breach notice may not be valid for a number of reasons including if it does not comply with the provisions of the Franchising Code of Conduct (the Code) and/or your franchise agreement.
The requirements for a valid and enforceable franchise breach notice are set out in the franchise agreement and the Code.
Under the terms of the Code a franchisor must:
- give you reasonable notice in writing that the franchisor proposes to terminate the franchise agreement because of the breach;
- tell you what the franchisor requires to be done to remedy the breach; and
- allow you a reasonable time to remedy the breach.
If the franchise breach notice is valid, the franchisor cannot terminate the franchise agreement if the breach is remedied as required by the franchise breach notice.
What is a reasonable cure period for a franchise breach notice ?
The Code provides that a franchisor does not have to allow more than 30 days for a franchisee to remedy the breach.
Prior to the inception of the Code franchise agreements generally provided that a breach was to be remedied within 14 days.
Many franchise agreements still provide that a breach must be remedied in a period less than 30 days.
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 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.
Factors to be taken into account in assessing whether any period is reasonable include:
- the type of breach;
- whether you have previously received a notice for the type of breach;
- if the breach relates to outstanding monies, whether you have been given time to pay the outstanding monies before the issuing of the notice.
Good faith and franchise breach notices
Clause 6 of the Code provides that each party to a franchise agreement must act towards another party in good faith.
Any franchise breach notice or purported termination pursuant to a franchise breach notice must be subject to the overarching requirement that the parties act 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.
