Background
In this matter, our client was the franchisee. They had substantially breached the franchise agreement throughout the term and were currently in breach of that franchise agreement.
The breaches included without limitation:
- failure to pay superannuation to employees;
- failure to honor accrued entitlements of the employees;
- failure to open and operate the business during the core training hours;
- failure of the nominated manager to be at the business for 38 hours per week; and
- adverse findings from health inspections where cockroach infestation had been identified and a number of other hygiene and safety matter breaches.
What We Did
Our client came to us at a time when he had received further notices to remedy breach after previously having received such notices over a substantial period of time.
It was clear that the franchisor had run out of patience with this franchisee and had serious concerns about the operation of the business moving forward and the adverse impact this may have on the brand.
To this end, the franchisor had required the franchisee to remedy a breach in circumstances where the breach simply could not be remedied.
In these circumstances, we needed to take extensive instructions from our client (the franchisee) outlining the circumstances and reasons for the substantial breaches. We considered, amongst other things, that our client was adamant that he had made clear to the franchisor that he was unable to work in the business for the hours required.
The problem being though, the franchise agreement very specifically required that our client work in the business for those hours and that a failure to do so would constitute a substantial breach of the franchise agreement.
Our client admitted to us that he had been “too stingy” to seek legal advice when entering into this franchise agreement and instructed that he was not aware that he was required to operate the business for this length of time.
Our client instructed that the franchisor had told him on a number of occasions that the franchisor would renew the franchise agreement at the end of the term. However, they were unable to put a renewal clause in the franchise agreement for various reasons. The franchisor then told our client that, due to his various breaches and inability to operate the franchised business in a satisfactory manner, the franchisor would not be renewing the franchise agreement. The information reviewed did not provide sufficient evidence upon which we could rely to convincingly argue that the franchisor had misled and deceived the franchisee that the franchise agreement would be renewed at the end of the term in any circumstance without exception.
The franchisor’s termination of the franchise agreement, in circumstances where the lease for the premises had expired and the plant and equipment had little or no residual value, would have meant that our client would have lost $500,000 that he had invested in the business when he purchased it from a previous franchisee.
Outcome
We were able to successfully negotiate that the plant and equipment for the business would be purchased from our client for $150,000.
Whilst this did not recover our client’s initial investment, our client did profit from the operation of the franchised business during the term and, as such, the sale of the plant and equipment at the inflated price obtained an outcome that our client would not ordinarily have received.
Learnings
If the franchisee had engaged the services of a lawyer to review the documents prior to entering into them, the lawyer would have had the ability to advise the franchisee that it had no contractual right to a renewal of the franchise agreement and that the franchisee was required to work in the business for a minimum number of hours. That would have given the franchisee the opportunity to negotiate these clauses and, failing a successful outcome of those negotiations, elect not to proceed with a $500,000 investment in a business contractually at high-risk.
The fact that we were able to negotiate an outcome for our client, in these circumstances where arguably the franchisor was under no obligation to make any payment whatsoever to the franchisee, at least minimised the loss suffered by our client.
