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Your franchisor cancels your franchise agreement.

Consider a franchise agreement: you take out a franchise. Your franchisor cancels your franchise agreement and you, of course, disagree with this cancellation. You, as the franchisee, want your deposit back. The franchisor, a small business, refuses to return the deposit. Should you be entitled to damages for the original deposited amount as well the loss of your future prospects?

Franchise law- does it exist?

There is no specific franchise law and official definition of the word franchise in the English common law system. This non-existent franchise-specific legislation is a benefit that facilitates flexible drafting of franchise agreements. Also, business owners are  at liberty to set up business structures that augment and better effect any standard format franchise agreement. Therefore, the parties are commonly free to agree or dis-apply the terms of contracts, except for overriding or underpinning legislation. If a franchisor cancels your franchise agreement, how is this going to affect you and your staff?  What can you rely on to safeguard your franchise business and/or deposit (the loan that you may need to repay)?

Company law and related legislation

Generally, in the UK, franchisors are answerable to Company Law and laws relating to fraud including the Misrepresentation Act [1967] when selling franchises. However, there  is no obligation to issue pre-contract disclosure documents to possible franchisees about the business status of the franchisor. It is a matter for buyers beware! Due- Diligence!

We know that there are no laws regarding compensation rights on expired or non-renewed franchising, distribution or agency agreements. There is no authority accountable for implementing franchising laws and necessities in the UK. Good franchisors and franchisees are members of the British Franchise Association and follow their guidelines. Franchise agreements are a matter for business-business contractual obligations and the ‘fiduciary’ duties of directors or business owners. But Buyers Beware! Do Due Diligence!

We need to investigate reasons for cancelling a franchisee agreement after the cooling off period has ended. Some reasons for cancelling are financial difficulties, the franchisor’s personal reasons, fraudulent activities, or even dissatisfaction with the franchisee. Despite no franchise legislation, you have the option to pursue a claim for damages in court for breach of contract. But before that, attempt a dispute resolution out of court. Avoid costly and unnecessary court fees.

What are damages in contract law?

Damages in contract law are a legal remedy for the innocent party that is obtainable for breach of contract. This is usually an award of money, but not always. In Addis v Gramophone [1909]  the House of Lords held that “Contract law seeks to put the parties in the position they would have been in had the contract been performed”.

Awarding damages and / or settle out of court

In the UK there is no concept of ‘punishment’ in damages, so the payments reflect the actual loss only. But special damages are bestowed for quantifiable losses, such as loss of profits. In the case of Dunk v George Waller and Son [1970], the Court of Appeal held that where a breach of contract badly affects the claimant’s future prospects a sum can be awarded to reflect the loss.

So, what can you do if a franchisor cancels your agreement prematurely?  A solicitor can consider that you, the franchisee, be entitled damages for the original deposited amount as well the loss of your future prospects. Be sure to gather evidence as soon as you suspect that there might be a problem between you and your franchisor. Contact your advisor and accountant as soon as you can. Book an appointment with us if you need an advisor regarding your business.

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