Legal support in case of breach of contract in the network
Calculate the quote
Margherita Manca
Franchising is a type of commercial contract in which a company (franchisor) grants an entrepreneur (franchisee) the right to use its brand, business model, and know-how in exchange for a payment. This system allows one to open a business under an already established brand, with the franchisor’s support for the management and growth of the business. However, as with any contractual relationship, issues can arise if one of the parties fails to uphold their agreements.
When this happens, it is referred to as a breach of contract. This can occur, for example, if a franchisee stops paying royalties owed to the franchisor or if the franchisor fails to provide the promised support. In such cases, it is essential to know what tools are available to protect oneself and resolve the issue without incurring legal costs and consequences.
What can an entrepreneur do if the contract is violated? Is it possible to terminate without penalties? Are there tools to avoid going to court? In this article, we will answer these questions by explaining the most common causes of a breach of contract, how to handle the situation, and what strategies to adopt to prevent legal problems.
A franchise contract clearly establishes the duties and rights of both the franchisor and the franchisee. The franchisor commits to providing support, training, and the right to use the brand, while the franchisee must manage the business in compliance with the company’s guidelines and meet the economic and operational obligations outlined in the contract. However, in some cases, one party may fail to fulfill its commitments, leading to a contractual breach, known as a breach of contract. This breach can be total, when a fundamental obligation is not fulfilled at all, or partial, when the fulfillment is incomplete or delayed.
One of the most frequent problems is the failure to pay royalties and contractual fees. The franchisee is required to regularly pay amounts to the franchisor, often as a percentage of revenue. These payments cover ongoing support, advertising, and brand development. When a franchisee stops paying these sums, either due to financial difficulties or a deliberate decision, they risk penalties and, in more severe cases, contract termination.
Another cause of dispute is the violation of exclusivity clauses. Many franchise contracts stipulate that the franchisee operates exclusively within the brand’s network and does not sell competing products. If a franchisee, in order to increase profits, decides to introduce products from another brand, they may face warnings, penalties, or contract termination (see: Contract termination for non-performance: what it is and how it works – Canella Camaiora).
Misuse of the brand or know-how is another common violation. When a franchisor grants the use of their brand and business model, they expect specific standards to be upheld. If a franchisee alters the logo without authorization, uses unapproved advertising materials, or shares confidential information with third parties, they risk damaging the identity and reputation of the brand.
Failure to adhere to operational standards can also be problematic. Every franchise has precise rules to ensure a consistent customer experience. If a franchisee fails to follow these guidelines, for example by changing the store layout without permission or modifying the recipes of a restaurant chain, they could compromise the brand’s image.
Finally, prematurely closing the business without adhering to the contractual conditions can represent a serious violation. If the franchisee ends the relationship without notice or fails to pay any penalties provided, the franchisor may seek financial compensation for the damages incurred.
When a breach of a franchise contract occurs, it is essential to act quickly to avoid serious economic and legal consequences. The best strategy depends on the nature of the breach and the clauses stipulated in the contract. In some cases, the issue can be resolved through dialogue between the parties, while in others, more direct legal action may be necessary, such as contract termination or legal disputes.
The first solution to consider is always attempting an amicable resolution. Often, contract breaches arise from misunderstandings or temporary difficulties. Therefore, franchisors and franchisees should first try to reach an agreement through direct negotiation. If the breach is resolvable, the parties may negotiate modifications to the contractual obligations or agree on an extension of the fulfillment terms. If dialogue does not lead to a resolution, the next step is sending a formal notice. This is a written communication in which one party officially contests the non-performance and requests it be remedied within a specified time frame, warning of possible legal consequences if compliance is not met.
If the issue persists and no resolution can be reached, the option of terminating the contract may be considered. However, termination is not always an automatic option. Its conditions depend on what is specified in the contract and the severity of the non-performance. If the contract explicitly provides a right of termination, the procedure outlined must be followed, which may include sending mandatory notice and paying any penalties. In such cases, it is always advisable to consult a franchise law expert to avoid further liabilities.
In cases where the breach of contract is particularly severe and no resolution can be found, the only available path may be legal action. With the entry into force of the Cartabia Reform, before proceeding with legal action in court, it is mandatory to attempt a mediation procedure before a recognized conciliation body. Mediation allows the parties to confront one another with the help of a professional mediator, aiming for a shared solution without resorting to the courts. If mediation does not lead to an agreement, it will be possible to file a lawsuit to obtain damages or contract termination.
Addressing a contractual violation correctly is essential to minimize risks and protect one’s interests. Before taking any action, it is always advisable to carefully analyze the contract’s clauses and evaluate all available options.
Dealing with a contractual violation can be complex and costly, but prevention remains the most effective strategy to avoid legal problems. A clear and detailed contract is the first tool of protection: every clause must be precisely worded, without ambiguity, to clearly define the obligations of both parties. Furthermore, it is essential for the franchisor to continuously monitor compliance with the contract through regular inspections, financial audits, and quality control systems.
Another fundamental aspect is ongoing training for the franchisee. Many contract violations stem from errors due to insufficient knowledge of procedures or applicable regulations. A franchisor who invests in continuous training and updating for their affiliates significantly reduces the risk of non-compliance and helps maintain high brand standards.
If, despite these precautions, a breach of contract occurs, it is essential to quickly assess the situation and choose the most appropriate approach. Dialogue and mediation should always be the first options to avoid unnecessary legal delays and find a beneficial solution for both parties. However, if the breach is serious and there is no room for an agreement, contract termination or, in extreme cases, legal disputes may become inevitable. In any case, the choice of the most effective strategy should be based on a careful analysis of the contractual clauses and the potential legal consequences.
In franchising, as in any business relationship, the key to success is the proper management of contractual relationships. Preventing violations, acting quickly when problems arise, and adopting a strategic approach to dispute resolution allow businesses to protect themselves and ensure the long-term strength of the franchise network.
Margherita Manca
