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Incurable Defaults

By Kevin Adler
April 26, 2012

Franchising relationships are defined by contracts, but they are sustained when franchisors and franchisees trust each other and believe that the other is acting in the best interests of the brand and the system. Even when significant disagreements arise, franchise contracts provide for ways in which violations can be cured so that the relationship can continue. Unfortunately, on occasion, a franchisee's actions are so egregious that a franchisor decides that it needs to immediately terminate the franchise and declare that the relationship is irrevocably harmed: an incurable default.

These instances of incurable defaults are rare, said Gregg Rubenstein, partner with Nixon Peabody (Boston) in a recent webinar sponsored by his firm. But they have been upheld in circumstances when franchisors have been able to demonstrate franchisee theft, deception, self-dealing, and other severe misconduct.

“The terms of a franchise contract are usually held as sacrosanct. They are the starting point for a court's analysis. Where the terms are clear and unambiguous they will be enforced as written, and there will be no opportunity to interpret the terms,” Rubenstein said. “But there are times when, despite that clear language, we get a result that arguably is at odds with it. That is because, although franchising is inherently a contractual relationship, there is something more: the relationship of trust between the parties. The franchisor trusts that a franchisee will fairly report its revenues and protect the brand. The franchisee trusts that the franchisor will enhance and grow the brand. While we see language in franchise agreements stating this generally, its import goes beyond the language.”

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