When can a franchisor terminate a franchise? It says it right in the franchise agreement. Probably, toward the back of the franchise agreement, it says the franchise agreement may be terminated if….. These reasons for terminations in legal vernacular are called defaults. There are defaults that can warrant the franchise agreement being terminated immediately. And, there are defaults that allow a time for correction or a cure period. If a correction or cure period is stipulated, then the franchise may not be terminated until the cure period or correction period has lapsed and there is no correction. All this is laid out in the franchise agreement.
Is there ever a case where, a franchise agreement may be terminated contrary to wording of the franchise agreement? Yes. That is the case of 7-Eleven, Inc., v. Upadhyaya et. al. The franchise agreement between 7-Eleven and Upadhyaya said, for the first event, the franchise agreement shall not be terminated without notice and opportunity to cure. 7-Eleven terminated its franchisee Upadhyaya. 7-Eleven did not follow the words of the franchise agreement. It did not allow Upadhyaya notice or time to cure. The termination notice said ‘your franchise agreement is terminated immediately.’
How can that be? The franchise agreement between 7-Eleven and Upadhyaya said that the franchisee would be entitled to a period of notice and opportunity to cure prior to the termination of the franchise agreement. Is that permissible? The court said: 7-Eleven had the right to terminate the franchise agreement per New Jersey law without following the prescribed notice and time to cure period because:
A contract may be terminated without notice and opportunity to cure in specific circumstances, even where contractual provisions require such notice. LJL Transp., Inc. v. Pilot Air Freight Corp., 599 Pa. 546 . Notice and opportunity to cure provisions are not enforceable where a breach goes “directly to the essence of the contract, which is so exceedingly grave as to irreparably damage the trust between the contracting parties.” Id. at 567.
In essence the conduct of Upadhyaya was so heinous and grave that it damaged the trust of 7-Eleven and caused 7-Eleven irreparable harm. Upadhyaya was not ringing sales through the franchise POS system thereby reducing monies owed to 7-Eleven. This was not a minor issue. And, 7-Eleven had plenty of the evidence. 7-Eleven sent secret shoppers into the store. Of the 18 secret shops sent, it found 13 where the product purchased was not recorded properly by the store. Inventory reports showed that “reported purchases of cigarettes in the store exceeded reported sales of cigarettes by over $115,000.” In other words, the store was buying far more cigarettes than it reported selling to customers. …. [R]reported sales of candy, non-carbonated beverages, tobacco [not cigarettes], and grill items exceeded reported purchases by approximately $112,000.
The act of terminating a franchise agreement is lenient with legal consequences. Termination of a franchise agreement should be done only after a careful review of the agreement, the law, and facts. If done improperly, without cause and contrary to the franchise agreement or state laws, the legal ramifications can be huge. The franchisor could be forced to pay large sums for damages and lost profits to the franchisee. In this case, 7-Eleven had a copious amount of evidence, reports, videos, and compute readouts.
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