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Unravelling the Challenges of a Complex Franchise Agreement Exit

Posted by: Olexandr Kyrychenko
Posted in: Reading room
Date published: 29/12/2023

Franchising often involves complex terms and onerous obligations on the franchisee. It is important to have a full understanding and undertake thorough negotiations thereof. This case study examines the process of exiting a franchise agreement with a major international hotel chain after the franchisee ran into difficulties complying with their obligations under a franchise agreement.

Challenges in Compliance with Franchise Agreement

• Strict Agreement Challenges: The franchisee faced substantial difficulties due to the stringent nature of the franchise agreement.
• Reconstruction and Planning Permission Issues: The franchisee encountered obstacles in remodelling their hotels and obtaining necessary planning permissions in line with their obligations. These issues made compliance with the franchise terms nearly impossible.
• Severe Non-Compliance Penalties: The agreement stipulated significant penalties for non-compliance, adding to the complexity of the situation.

Strategic Approach and Legal Analysis

• Contract Review and Legal Challenges Assessment: Our team thoroughly reviewed the franchise agreement and the legal challenges faced by the franchisee.
• Contract Law Expertise: Utilising our deep understanding of franchise law, we focused on the nuances of impossibility in fulfilling certain contractual obligations and their overall impact on the contract.
• Solution Development:We successfully devised a strategy that enabled the franchisee to withdraw from the franchise agreement, negotiating a settlement with minimal penalties.

Interpretation of Contractual Terms

• Royalty Clauses and Exit Fees: A significant aspect of the dispute involved interpreting the contract’s royalty clauses and exit fees together with their interaction with various obligations imposed by the franchise agreement.
• Implied Terms and Frustration: We established that an arguable case existed to imply further terms into the franchise agreement and invoke the principle of frustration of contract allowing the franchisee to walk away from the franchise agreement.
• Negotiation Strategy and Settlement: Having identified issues with the franchisor’s position we were able to agree a favourable settlement, avoiding potential multi-million-pound penalties, without need for formal dispute resolution.

Insights

Franchising is a complex area of law where it is critical for franchisees to obtain comprehensive advice in particular noting that franchise agreements are often very lengthy contracts which involve substantial investment on the part of the franchisee. Whether you are aiming to enter a franchise or are seeking a quick and cost-effective exit, our experienced team can guide you through the process and minimise risk and potential expense.

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.

To find out more about our services, visit Mergers and Acquisitions section of our website.

Call us now to discuss your case 0330 107 0106 or email us at business@imd.co.uk.