What are sufficient grounds for terminating a franchise?
- Franchisee adds unauthorized food items to the menu.
- Franchisee make takes artistic liabilities with the Brand Logo in published advertisements
- Franchisee fails to name the franchisor as an additional insured on its insurance policies.
Are these sufficient grounds for the franchisor to terminate the franchise agreement? An arbitration panel deciding question followed a two-step process to determine the answer.
- Does the franchise agreement allow termination for these violations?
- Is there a lesser available alternative to termination?
The case was Benihana, Inc. [BI] v. Benihana of Tokyo, LLC [BOT]. The franchise agreement at issue had two applicable termination provisions.
If [BOT] violates any  substantial term or condition of this Agreement and [BOT] fails to cure such violation within thirty  days after written notice from [BI] to cure same; [or]
If [BI] gives  three  notices of any default hereunder [and such defaults are thereafter cured], within any consecutive twelve  month period ….
The arbitration panel majority found that the franchisor had a contract right to terminate the franchise agreement, but failed uphold a termination of the franchise agreement saying that a less harsh alternative of injunction compelling the franchisee compliance existed. This is a bizarre finding by the arbitration panel, which the court reviewing the case questioned, but was powerless to change.
This case highlights the uncertainty associated with the arbitration and court reviews of the franchise terminations and defaults. Though questionable, uncertain, bizarre, and perhaps not required, the arbitration panel’s process of asking about less harsh alternatives to termination is worth consideration. Franchise termination carries a high probability for arbitration or litigation challenges and the outcome of such challenges is never certain.