Facing a franchisee conflict? Key steps to document, enforce, and resolve non-compliance

1. Document defaults and act in good faith

Begin by thoroughly evaluating the severity of the issue and gathering comprehensive evidence, including compliance history, payment records, operational standards, and documented communications or notices of default. Courts scrutinize franchisors’ conduct, especially in termination cases, to ensure actions are neither arbitrary nor excessive. Clear, organized documentation reinforces the franchisor’s adherence to good faith, demonstrating that reasonable opportunities were provided to remedy breaches. A well-documented record is invaluable if the matter escalates to litigation, where it shows systematic non-compliance and prior remediation efforts.

Further guidance: See  “The devil is in the details: gathering evidence to bolster your case” for best practices in documenting defaults.

2. Enforce defaults

The franchise agreement serves as the main tool for enforcing franchisee obligations. Common breaches, such as non-payment and failure to meet operational standards, require immediate action. For non-payment of fees, royalties, or other financial obligations, issue a formal notice specifying a clear deadline for payment to protect the franchise system’s revenue. For operational breaches, document the deficiencies in detail and send notices outlining the standards in question and the corrective actions required. Both steps show good faith and lay the groundwork for a stronger position should litigation become necessary.

Additional resources: For more on addressing curable defaults, refer to “Obstacles in terminating franchisee and taking over location” and “How to terminate a defaulting franchisee”.

3. Evaluate rescission risk

If a franchisee’s response includes the possibility of rescission, they are essentially seeking to void the franchise agreement, often citing issues with the Franchise Disclosure Document (FDD). A successful rescission claim can expose the franchisor to significant financial liability and potentially destabilize the franchise system. Key considerations for assessing rescission risk include:

• Disclosure document accuracy: Was the FDD complete, with required financial statements, a fully signed and dated franchisor’s certificate, and all material facts presented in one package? If the FDD contains omissions, outdated information, or was delivered piecemeal, the franchisee may argue that they were deprived of critical information.
• Material facts and changes: Review whether all location-specific and significant changes were disclosed. A strong defense requires evidence that all material facts were provided in the FDD.
• Documented receipts: Ensure that the franchisee signed receipts listing all documents in the FDD package, as these can counter claims of insufficient disclosure.

Further reading: For an in-depth look at disclosure compliance, see “Franchisors must comply with these disclosure requirements”.

4. Enforce non-competition covenants post-termination

If a former franchisee begins operating a competing business after termination, enforcing non-competition clauses is essential to protect the brand. To strengthen enforceability:

• Specific definitions: Define “competing business” clearly within the clause. For example, in the quick-service restaurant (QSR) industry, this may include businesses selling specific items like pizza or wings.
• Reasonable time periods and territories: Courts are more likely to uphold non-competition clauses with time and geographic restrictions that align with commercial needs. Restrictions that mirror the franchise’s operational footprint enhance enforceability.

Related reading: For more on non-compete enforcement, see “Are non-competition restrictions enforceable?” Where the agreement lacks a strong non-compete clause, consider alternative actions, such as seeking to protect confidential or proprietary information through injunctions.

5. Consider alternative resolutions

In some cases, working with the franchisee through negotiated solutions can mitigate risk and preserve stability. Options such as allowing the franchisee to resell their business or having the franchisor temporarily manage the location while finding a new franchisee can be practical alternatives to termination. If these solutions are unviable, pursuing formal termination and preparing for potential litigation may be necessary. At this stage, close collaboration with franchise litigation counsel is essential to develop a strategy that minimizes risk and strengthens the franchisor’s position.

Further guidance: For more on alternative solutions and self-help remedies, refer to  “Enforcing performance standards in franchise agreements”.

Conclusion

Proactive and thoughtful management of franchisee disputes reinforces the franchisor’s commitment to a fair, consistent, and resilient network. By thoroughly documenting defaults, enforcing compliance, understanding franchisee rights, and exploring alternative resolutions, franchisors can protect their brand and mitigate risks. When litigation becomes unavoidable, a well-documented record and close collaboration with litigation counsel provide a solid foundation to uphold the franchisor’s rights and maintain system integrity.

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The information contained in this article is provided for informational purposes only and does not constitute legal advice. Readers should not act on this information without seeking professional legal advice from a lawyer experienced in this area. The content in this article may not reflect the most current legal developments, and the application of law can vary in different provinces and territories. As such, the information in this article is not guaranteed to be complete, correct, or up to date. The author and the publisher of this article disclaim all liability for any actions taken or not taken based on any or all of the contents of this site.

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