Franchisors & Licensors – Can you enforce post termination provisions?

A recent case in Virginia, USA has highlighted the need to keep international franchise agreements under review and the value of taking local law advice when granting international franchises.

The United States Court of Appeal have held that, in some situations, reference to “termination” in a franchise agreement does not include “expiry” of the agreement.

In the Virginia case this has had serious consequences for the Franchisor, which has been barred from enforcing the contractually agreed consequences of termination provisions when the franchise agreement expired. These provisions included critical non-compete and non-solicitation clauses.

The Franchisor was therefore unable to stop its former Franchisee from setting up a competing business from the same premises, within days of the Franchisee closing the franchised business. This will have seriously undermined the Franchisor’s ability to re-sell the franchise business in that territory and also damaged its value.

In this case, if the consequences of termination had applied on both “termination and expiry” then the Franchisor would have been able to enforce them on expiry as well as on termination.

The dangers of a one size fits all approach

This case is a valuable reminder of how words in contracts can be interpreted differently under different laws and by different courts and panels. It highlights the dangers of simply rolling out a one-size fits all, standard form, international franchise agreement. There are also many unusual local laws that can apply to international franchise arrangements and often override any choice of law set out in the agreement.

What can franchisors do to protect their position?

Franchisors can minimise this and other unexpected pitfalls by having their franchise agreement comprehensively reviewed by local franchising specialist lawyers. It is important to regularly review and update agreements and having fresh eyes check them over can help to spot defects. At the very least, after this Virginia case, international franchisors should check that their consequences of termination provisions apply both “on termination” and “expiry”.

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