Franchise Law – Insolvent Franchisors

The Borders and Angus Robertson Administration should be of interest to all Franchisees. The appointment of Administrators to the RED Group has a potential impact for all Franchise business trading under the Boarders and Angus Robertson banner.

Interestingly, a group of Franchisees declared its intention to terminate the Franchise Agreement. It is unclear as to the basis of such termination. However, we note that the Administrator are prepared at this stage to test the termination in the Courts.

As a general principle a Franchise is severely prejudiced by a Franchisor entering into Administration. The Administrator can disclaim onerous Contracts (including the actual Franchise Agreement). Where a Franchisor owes money to the Franchisee (for example, where the Franchisor collects all receipts before paying out moneys to the Franchisee) these monies are a debt in the administration and is only recoverable as an unsecured debt in the administration process.

Importantly, there does not appear to be an automatic right to terminate a Franchise Agreement upon the insolvency of a Franchisor. In some, albeit unusual cases, a Franchisee may have a contractual right to terminate. Otherwise a Franchisee will only be capable of terminating if it can establish that the Franchisor is in breach of essential terms of the Agreement. Arguably, the failure of the Franchisor to perform its obligations of maintaining and securing the integrity of the network, maintaining and marketing the business, providing training, assistance and otherwise performing its usual duties, would constitute a grounds for a breach. However, the actual establishment of the breach and the ultimately terminating is often difficult and the rights of the Franchisee to do so is often unclear.

Franchisees should try and protect themselves against any potential Franchisor insolvency by doing the following:-

  1. Undertaking full due diligence as to the Franchisor prior to entering into the Franchise Agreement.
  2. Limiting any guarantees that the Franchisee provides in favour of or in support of any Franchisor obligations.
  3. Negotiates specific “get out” clauses in the event that of Franchisor insolvency.

 

Heath Adams is a Director of Adams & Partners Lawyers, and head of the commercial legal team within the firm. Heath’s primary focus is on servicing clients in the franchise sector including new and emerging franchise systems. He is an accredited specialist in Business Law. Read more about Heath here.

About Heath Adams

Heath Adams is a Director of Adams & Partners Lawyers, and head of the commercial legal team within the firm. Heath’s primary focus is on servicing clients in the franchise sector including new and emerging franchise systems. He is an accredited specialist in Business Law. Read more about Heath here.