Franchise agreement, dissolution
It often happens that a franchise formula ceases to exist. There may be various reasons for this. What often happens is that a franchise formula is taken over by another franchise formula in order to join forces and thus strengthen the market position. Such an acquisition can have a major impact on franchisees, as the franchisees of the acquired format are expected to honor their franchise agreement and – whether or not forced – to join the acquiring franchise format. Do the franchisees have to conform to their fate or do they have the option to choose their own course?
Prior to a franchisee’s decision to join a franchise formula, a franchisee often made many considerations, which ultimately led the franchisee to decide to opt for the relevant franchise formula and not for a competing franchise formula. This may be related to the culture or image of the formula, but also, for example, to the revenue model in combination with the floor space of the building in which the company is operated. Sometimes it is even just a matter of feeling or trusting a formula. The announcement by a franchisor that the formula to which the franchisees have committed themselves will cease to exist can also be a hard blow, especially if franchisees are requested to correctly and fully comply with the franchise agreement until the expiry date and to join the acquiring formula which may differ in many respects from the current formula.
Franchisees do not have to conform to their fate. There are options to dissolve the franchise agreement in such situations. A legally valid dissolution requires that there is default on the part of (in this case) the franchisor. The default generally only takes effect after the franchisor has been given notice of default by the franchisee and the franchisor has been given a reasonable period of time to take measures to bring the situation back into compliance with the franchise agreement. However, if it appears from communications from the franchisor that the franchise formula will cease to exist, a notice of default is not always required to allow the default to take effect. Franchisees who demand unaltered performance of the franchise agreement may, based on the law and jurisprudence, reasonably infer from such communications that the franchisor would fail to do so.
It is also required for a legally valid dissolution that it is sufficiently plausible that the franchisor has failed to fulfill one of the obligations under the franchise agreement. Implementing unilateral policy changes that are so far-reaching for franchisees can, according to case law, already lead to such a shortcoming. The fear of franchisees that the franchisor will make little or no effort to keep the formula in the market at the same level as before may then be justified. Compliance with the franchise agreement cannot therefore be required of franchisees in those cases.
Ludwig & Van Dam franchise attorneys, franchise legal advice