Franchising · 10 September 2018

My franchisor went out of business: Why am I stuck with a £4,000 termination fee?

guide to franchising
When one company goes into administration and its business is taken over by another, it can become quite complicated to sort out what has happened

What happens when your franchisor enters administration? Is your franchise agreement automatically terminated? Grid Law founder David Walker helps a franchisee understand their contractual obligations under new investors.

Question

I was recently a franchisee with a driving school company but the company went into administration last year and it was taken over by investors. They sent me a new contract but I never signed it as the terms had changed and the franchise fee had gone up. I decided to leave as I wasn’t making any money and only just paying the franchise fee.

They are now they are trying to charge me over £4,000 because they say I didn’t give them enough notice to terminate the contract. I have no idea how they came to this amount.

Please can you advise what I should do as they are extremely harassing.

[After receiving this question, the reader and I had a few exchanges of email so I could find out some more information and details about what had happened. I also read both the old and new contracts to see what the changes were.]

Answer

Thanks again for your question and all your additional information regarding this dispute.

When one company goes into administration and its business is taken over by another, it can become quite complicated to sort out what has happened. We will do our best to unravel what has happened here so I can advise you what your position is.

To summarise my understanding of your situation, you entered into a franchise agreement with Company A in around 2014.

Company A was not profitable and its cash flow was becoming tighter and tighter. It was clear that Company A couldn’t survive so an administrator was appointed on 27 April 2017.

The administrator then sold some of Company A’s assets to Company B and Company B continued to run the business of Company A.

From your perspective, there are two important points to note about this.

First, Company A going into administration doesn’t automatically terminate your contract with them and second, your contract isn’t an asset that could be purchased by Company B. However, it seems like they are acting as though they have taken over some form of relationship with you and you have accepted this. (We will come to what this relationship is below.)

The only way that your contract could be transferred from Company A to Company B is if you agreed to the transfer. This is a process known as “novation”. To novate a contract, you, Company A and Company B would all enter into a novation agreement whereby Company B agrees to step into the shoes of Company A and you give your approval of this.

This didn’t happen so your contract with Company A will have continued until one of you terminated it, or until the company went into liquidation and was finally dissolved.

In this situation, it’s not clear who terminated the agreement. My view is that termination happened on 27 April 2017 when Company A, as franchisor, stopped providing their services to you because they sold their assets to Company B.

Ultimately, it doesn’t really matter who terminated the agreement between you and Company A. Company A has now been dissolved so neither of you will be pursuing the other for breach of contract.

What complicates your situation is that you continued working as a driving instructor under Company A’s brand (which was purchased by Company B) and you also carried on paying your franchise fee. However, due to the administration of Company A you started paying the fees to Company B.

Therefore, I believe you entered into a new contract with Company B but the terms are unclear because you never signed the new contract they sent you.

So, the questions we need to answer to see if Company B has a legitimate claim against you is:

“What are the terms of your new contract with Company B and have you breached them?”

There are quite a few similarities between the old and new contracts so the most likely scenario is that a new contract was formed with Company B on approximately the same terms as your old written contract with Company A.

Company B may have assumed that you accepted the terms of their new contract and if they did they were wrong to do so. This is because you cannot accept a contract through silence. You must positively agree to the terms, which you did not.

Both you and Company B seem to have accepted that there was a contractual relationship between you and the problems only arose when Company B attempted to increase the franchise fee.

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Franchising

 

My franchise agreement has been terminated – can I start a rival business?

If your franchise agreement is terminated for a breach of contract, is there anything to stop you launching a rival business?

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Looking at both the old and new contract, the franchisor is entitled to increase prices. There is no requirement for them to give you any notice of a price rise so they are not in breach of contract by doing so. (Whether or not this is reasonable is another matter and is an argument we may raise if they try to take legal action against you.)

Under the terms of the contract, if you don’t accept the price rise or it becomes uneconomical for you to continue your business as a driving instructor (as has happened here), your only option is to terminate the contract.

Both the old and new contracts say you must give three months’ notice if you wish to terminate them and there is a specific procedure to follow. The one week’s notice of termination which you mentioned is a cooling off period where you can change your mind after entering into the contract. This cooling off period doesn’t apply as your relationship continued far longer than one week.

I see that you only gave one week’s notice and therefore you didn’t terminate the contract correctly. It seems that Company B didn’t accept your termination but instead terminated the agreement themselves after the arrears of franchise fees started to increase.

The position now is that Company B has sent you an invoice for £4,048.00 (inclusive of VAT) and you are refusing to pay this.

If Company B wanted to pursue legal action to recover this outstanding invoice, the burden of proof would be on them to prove their case.

To successfully pursue their claim, they will have to prove four things:

  1. That you entered into a contract with them
  2. What the terms of that contract are
  3. That you breached those terms
  4. As a result of your breach of contract, they have suffered a loss

Proving the terms of the contract is likely to be their hardest task and this will give you the greatest opportunity to defend any claim they make.

We may be able to argue that no contract was formed between you and Company B. However, this doesn’t mean that you don’t owe them anything. A court could decide that you should pay them a fair amount for the services they provided (i.e., the services of acting as your franchisor). The court would then decide what a fair amount was.

This means you have 3 options:

First, you could pay their invoice, whether or not you believe it is due.

This would give you closure of this matter and you would be safe in the knowledge that no legal action would be taken against you.

Second, you could refuse to pay the invoice.

Whether or not Company B decides to take this matter further is a matter for them. If they did, you could then decide to pay or you could defend the claim giving your reasons why you believe the money isn’t due.

Third, you could try to negotiate a settlement of this matter.

This would involve agreeing a lower amount to pay to bring this dispute to a conclusion. A negotiated settlement is usually the best option but it can never be guaranteed as you would both need to agree on the sum to be paid.

It’s impossible to say whether or not Company B will pursue a legal claim against you. My view is that you do owe them something and this is most likely to be 13 weeks of franchise fees (which is less than the value of their invoice). Therefore, I would recommend trying to negotiate a settlement based on or around this figure.

Hopefully this gives you a better idea of what your position is so you can decide what to do.

If there is anything you would like me to clarify, please feel free to email me again at editors@businessadvice.co.uk.

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ABOUT THE EXPERT

David Walker is the founder of Grid Law, a firm which first targeted the motorsport industry – advising on sponsorship deals, new contracts and building of personal brands. He has now expanded his remit to include entrepreneurs, aiding with contract law, dispute resolution and protecting and defending intellectual property rights.

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