Recoverability in times of crisis

A recurring theme in this contribution to the First Franchise Newsletter is the payment discipline within franchise organizations, in particular with regard to the payment obligations of franchisees to their franchisor. The major risks involved in allowing payment arrears to accumulate have already been discussed several times. In practice, franchisors often lament that they feel held hostage by their franchisees, and that may not always be far from the truth. After all, the relaxation of payment conditions, often with regard to fees and goods supplied, arises from a rightly perceived duty of care on the part of the franchisor towards its franchisee, who may not be doing very well at that time. The reasoning then is that, by giving the involved franchisee some more financial room, difficult times can be overcome more easily. Too light, however, a habit arises and it does not stop at a single invoice. In practice, there are numerous examples of huge payment arrears, sometimes amounting to an annual turnover or more, which ultimately can no longer be made up in any way by the franchisee concerned. Depending on the size of the franchise organization, and the extent to which such situations occur in that organization, such a state of affairs can be downright life-threatening for the entire franchise organization in question.

The credo for both franchisors and franchisees therefore remains to avoid payment arrears. However, if this does happen, for whatever reason, then as a franchise organization ensure a strict approach to the whole. In order to be able to take effective legal action against a defaulting franchisee at any time, that franchisee must be given notice of default in time, which, in short, means that he is given a period within which the payment arrears must be made up in full or in part, failing which the franchisee concerned is in default and the payment arrears can actually be claimed, whether or not in court and whether or not reinforced by compensation of (contractual or statutory) interest and costs. Unfortunately, in practice such a notice of default is sometimes omitted, which only makes the actual collection of claims more difficult. The feeling of being “hostage” also often arises among franchisors from the fact that franchisees experiencing payment difficulties often attribute these payment difficulties, rightly or wrongly, to the franchisor. All kinds of reproaches then fly over the table, the franchisor would not adequately comply with the franchise agreement, the forecasted turnover will not be achieved, et cetera. When the franchisee in question subsequently constructs a claim against the franchisor based on this, a so-called counterclaim, the legal discussion is completely endless and a court procedure has often become unavoidable. In that case, there is immediately a question of a complex legal procedure, with demands and counterclaims on both sides, and moreover often relevant amounts involved. Such a procedure can easily take up to two years. If the franchisor ultimately wins the proceedings, it remains to be seen whether and to what extent it will still be able to recover its original claim, namely the unpaid invoices: in many cases the franchisee is , partly as a result of the lengthy procedure, financially exhausted to such an extent that bankruptcy or debt restructuring appears to be the only realistic option. In addition to all procedural costs, the franchisor is then left empty-handed.

The moral of this story: do not allow payment arrears to arise and pursue a strict debtor policy. This is in the interest of both the franchisor and its franchisees and keeps the relationship clear and pure.

Ludwig & Van Dam franchise attorneys, franchise legal advice