What are the conditions for terminating a franchise agreement ? What are the practical consequences ?
The termination of a franchise relationship, whether initiated by the franchisor or the franchisee, must be anticipated in order to comply with contractual commitments on the one hand and mandatory rules on the other hand.
Contract term
Franchise agreements are often concluded for a fixed term—from five to ten years generally—and may terminate automatically on the agreed expiry date in the absence of tacit renewal or an amendment formalizing renewal for the same term or a new term agreed between the parties.
In principle, this term is binding on each of the parties, which cannot unilaterally terminate the contract before the end of the term, except in certain cases (see below).
If, however, the relationship continues beyond the contractually agreed term, the contract may become an open-ended contract, making it possible for either party to terminate it unilaterally and without cause, subject to reasonable notice.
Early termination of the contract before its term
Early termination of the contract may occur:
– By mutual agreement between the parties,
– By application of an early termination clause, specifically targeting breaches by either party giving rise to this unilateral termination, subject to a notice period or not, and
– In the event of a sufficiently serious breach (e.g., damage to the network’s image, failure by the franchisor to transfer know-how, etc.).
Even if there is a valid reason for terminating the contract, a reasonable notice period o must generally be given, allowing the party in breach to remedy such breaches, unless otherwise specified in the contract.
Consequences of termination
Consequences arise from the termination of the franchise agreement before its term.
In the absence of termination for breach, it may be considered, under certain conditions, as abrupt, and thus entitle the party to damages.
When termination is implemented in the event of a breach by the franchisee, it is common for franchise agreements to provide that in such cases, the franchisor is entitled to receive the royalties that would have been due if the agreement had not been terminated, i.e., until the expiry of the contractually agreed term.
In addition, the termination of the agreement, for whatever reason, entails several obligations for the franchisee, who must, in particular:
- cease all use of the trademark, know-how, or distinctive signs, under penalty of committing acts of unfair competition or counterfeiting;
- extract and/or delete and/or return all data to which they had access under the contract;
- comply with non-competition and confidentiality clauses that may continue to apply after the contract; and
- comply with the non-affiliation clause, which remains in force for one year after the end of the contract.
To find out about your rights and obligations before drafting a franchise agreement, please do not hesitate to contact us.