How to Legally Terminate a Franchise Agreement

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A man is signing a contract.
A man is signing a contract. (Image: Ridofranz/iStock/Getty Images)

Businesses operating under a franchise have permission to market, sell or use goods or services under the franchisor's brand. The business operator, or franchisee, usually signs a franchise agreement giving him the right to operate the franchise for a certain period of time. That franchise agreement is a legal contract, and your state’s contract laws will determine whether and how you can cancel the arrangement.

Termination By Contract

You may terminate the franchise agreement if the contract says you can. You must follow the protocols specified in the legal agreement. For example, a termination clause may give the franchisor the right to cancel the arrangement after five years by giving three months’ notice in writing. When the notice expires, the contract automatically ends. However, if the franchisor only gives oral notice of his wish to cancel or sends notice to the wrong recipient, the notice may be invalid. It’s a good idea to consult an attorney before you serve a termination notice.

Termination for Material Breach

Many states recognize a the right to terminate a contract in the case of a “material breach” of the contract terms. “Material breach” is any action that strikes at the heart of the bargain made between the parties. Such action is designated curable or incurable. Examples of incurable breach include bankruptcy or criminal conviction. As the defaulting party cannot fix these problems, the contract automatically ends when the incurable event occurs. Failing to pay franchise fees or follow the franchisor’s requirements, such as those relating to signage and uniforms, are curable breaches.

Serving a Material Breach Notice

Most contracts give the defaulting party a reasonable period to remedy a curable breach. Common periods are 45, 60 or 90 days. If the contract does not specify a reasonable period, state law likely will imply one. In order to cancel a contract for material breach, the non-defaulting party first must serve written notice identifying the breach and asking the defaulting party to remedy it within the cure period. If the breach continues at the end of the cure period, the agreement comes to an end.

Defenses to Material Breach Termination

The defaulting party may have a legal defense to the termination. For example, a franchisee faced with termination due to late payment may claim that the franchisor habitually accepted late payments and thus waived his right to terminate the agreement. A franchisor faced with termination because he failed to supply training and support as specified in the contract may resist termination on the grounds that the breach was immaterial and did not affect the profit achieved by the business operator. Always seek legal advice before terminating a contract for material breach.

Shaking Hands on a Deal

If you cannot invoke a termination clause and you cannot prove material breach, the final option is to negotiate a way out. Your success depends on your bargaining strength and whether you are prepared to reach a compromise. Suing -- or threatening to sue -- for breach of contract is an option if the other party is not upholding his side of the bargain. A franchise company may let you out of the contract. Some will even refund your upfront fees, especially if you can show that you have upheld your side of the bargain. A mediator may help if conversations are breaking down.

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