Whether a franchisor or franchisee, the same issues seem to come up again and again with no end and no resolution. 

  • A consumer complaint regarding franchisee’s services is received by the franchisor.  This is the third complaint on the same issue. 
  • The franchisor goes to the franchised business every year and completes a quality inspection.  For the last 2 years, the franchisee has failed the inspection.
  • The franchisor has sent 4 notices to the franchisee, always the same issue.  The franchisee is offering services and products not permitted under the franchise agreement. 

The mindset becomes that the franchisor will not do anything.  This has happened before.  Things have been this way forever; there is no way the franchise agreement can be terminated. 

In the case of Smith’s Sports Cycles, Inc. v. American Suzuki Motor Corporation, a case out of Alabama, it happened.  For over two years, the franchisor had informed the franchisee that the appearance of his franchised business’ service department needed to change.  It needed to be painted.  The franchisee needed to buy more workbenches, tool storage facilities and vehicle lifts.  The place just needed to be cleaned up.

Finally, the franchisor sent a default notice followed by a termination notice.  Paint the place, buy new equipment, and clean it up or your franchise agreement is terminated.  The franchisee objects: ‘you cannot terminate me, this is the way my shop has been since 1986.’ 

Under Alabama’s Motor Vehicle Dealer Law, a franchise agreement cannot be terminated for a breach that is over 180 days old.  This is a codification of the waiver doctrine.  If you do not say anything when it happens, you cannot complain later.  This concept of waiver is a fundamental contract principal, ever present in the franchise industry. 

In this case and numerous other cases identified by court, the court rejects the concept of waiver.    The court found that the franchisor could terminate the franchise agreement.   Every day that the service department was not clean, not painted, and not equipped, there was a new violation under the franchise agreement that was cause for terminating the franchise agreement.  Even though the franchisor chose not to terminate the franchise yesterday, there was a new breach today and the franchisor had grounds to terminate the franchise agreement. 

Lesson from the court:  What happened yesterday may not be an issue, but if you do the same thing today, it could be a breach and grounds for termination of the franchise agreement today.

Lessons from the Court Room: Same Old Same Old Is No Defense to Defaults

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