If you pick up any franchise agreement and skim to the section where it discusses termination, I’d bet my left arm that you’ll find a long list of franchisee defaults that can result in termination by the franchisor. And, if the franchise agreement mentions the franchisee’s right to terminate at all, it is probably limited to one quick paragraph.
“Outrageous!” you might say. “One-sided!” you say.
Relax. It isn’t (necessarily) as bad as it looks. There are good reasons and bad reasons for these provisions – and if you are a prospective franchisee and are going to hire a lawyer to review your franchise agreement, you need to hire a lawyer that knows which is a good reason and which is a bad reason.
Twenty years ago, when I was a new franchise lawyer, I don’t recall seeing any franchise agreements that addressed a franchisee’s right to terminate at all. Certainly, the franchise agreements that I wrote did not. But, of course, the franchisor’s rights to terminate – immediately, without notice, with notice, with notice and opportunity to cure – were always explicitly spelled out. When I would represent franchisors in negotiations with a prospective franchisee’s lawyer, I could usually count on them mounting their high horse with theatric indignity and disparaging my intentions, my ethics and – occasionally – my parentage. The first time that happened, I think I was deeply offended. Over time, it became a bit of an amusing parlor game … “let’s see how worked up this attorney will get over this!”
Once the franchisee’s lawyer had explained how deeply offended they were by the one-sidedness and manifest unfairness – Nay! Unconscionability! – of the termination provisions, I would then have to explain why these provisions exist at all.
Your average business lawyer is probably not aware of the degree to which franchising is governed by state law and the degree to which those state laws limit a franchisor’s rights. Aside from the franchise sales laws (that require that a disclosure document be provided to a prospect, and sometimes filed with a state agency), many states place limits on a franchisor’s rights to terminate, not renew or refuse to consent to transfer the franchisee’s rights. Typically, those state laws require that the franchisor have “cause,” or “good cause” or “just cause” to terminate (or not renew or refuse to consent to transfer) the franchise agreement. But, these laws typically don’t go into much detail about what is “cause,” or “good cause” or “just cause”. To put it another way, to terminate a franchise agreement in those states, a franchisor clearly must meet a higher standard than it would if the state law did not exist, but the laws don’t provide a detailed explanation of what that standard is.
The detailed provisions in franchise agreement providing for a franchisor’s right to terminate that have been included in franchise agreements for decades are an attempt by the franchisor to put both the franchisee and the courts on notice that the listed defaults are serious enough to meet the heightened standard under a state law (whatever that may be). Might a franchisor go too far occasionally? Sure. But, the existence of the list of defaults is not a sign of unconscionability, by itself. If your lawyer is arguing with your future franchisor about that, they are wasting time and your money – and may be causing the franchisor to question if you are really a good candidate for the franchise. And, if they aren’t well-versed in franchising, they may have no idea which provisions go too far and which do not.
About 10 years ago, I started to notice that other franchise lawyers started to put provisions in the franchise agreement providing for a franchisee’s right to terminate. Clearly, some crafty franchisor-lawyers were trying to address the complaints of “Outrageous!” and “One-sided!”. Typically, these provisions say that a franchisee may only terminate if the franchisor is in “material default” (or something similar) of specific provisions of the franchise agreement AND if the franchise has given the franchisor an opportunity to cure the default. Often the provisions are even more squirrelly, including vague standards and granting broad discretion to the franchisor about what constitutes a cure. These provisions may even state that any grounds for default are waived if not raised within a limited time. Those franchisors and their lawyers would then puff their chests and congratulate themselves for their great virtue and fundamental fairness.
There are no laws that limit a franchisee’s right to terminate the franchise agreement. Common law provides a standard under which a party to a contract may terminate it. If anything, these provisions provide a heightened standard for the types of franchisor defaults that will justify a franchisee’s termination. They certainly create more pre-requisites for a franchisee to terminate the agreement and may actually cause a franchisee to inadvertently waive rights to terminate if they don’t raise issues soon enough.
If your lawyer does not understand this, you need to find someone else.