Liquidated Damages for Breach of Franchise Agreement?


Liquidated damages (also referred to as liquidated and ascertained damages) are damages whose amount the parties designate during the formation of a contract for the injured party to collect as compensation upon a specific breach (e.g., late performance).

https://en.wikipedia.org/wiki/Liquidated_damages

Yes, was the answer of court in the case of Howard Johnson International, Inc. v. Manomay, LLC.  The franchise agreement, in this case, had a liquidated damage provision, which allowed the franchisor, Howard Johnson, to collect liquidated damages in the event that the franchisee breached the franchise agreement.  The franchisee breached the franchise agreement by not paying.  Howard Johnson terminated the franchise agreement and demand payment of unpaid royalties and liquidated damages. 

The court awarded the Howard Johnson the payment of unpaid royalties, attorney fees, and liquidated damages totaling $89,691.60.


[W]hen a liquidated damages clause for a commercial transaction is negotiated by parties with comparable bargaining power, the ultimate issue is whether the amount of liquidated damages is reasonable, either at the time of contract formation or the breach.

Ramada, 2018 WL 3105421, at *5

The court citing case precedent held that liquidated damages in commercial contracts negotiated by parties with comparable bargaining power are enforceable if the amount of liquidated damages is set at the time of contacting and the amount is a reasonable forecast of the harm resulting from breach.

Franchisor Auditors and Inspections

Do you complete inspections and audits of your franchise locations?  Are the inspections done as a matter of routine practice? Do you only complete audits and inspections if a problem is reported?  If an inspection yields findings of subpar operating standards, what do you do with the results? 

Following brand standards, reporting revenues, and paying royalties
goes to the core of the franchise relationship. Failure to follow the franchisor’s brand standards can irreparably harms the goodwill of the franchisor and the franchise system.

Franchise audits and inspection can be way to ensure brand uniformity, quality, and compliance with operating standards. Read about:

  • How Are Compliance Audits are being Conducted
  • When Are Compliance Audits Done
  • Franchisee Perspective On Compliance Audits
  • What Courts Have To Say About Compliance Audits

See our article that appeared in Franchise Law Journal!

Compliance Audits Rule!

or visit: https://gettinslaw.com/publications/the-how-when-and-why-of-franchisor-audits-and-inspections/

Read the article!

You May Need More Capital To Offer and Sells Franchises in California

There are no hard and fast rules about how much capital or money a franchisor is required to have in the bank.  If a franchisor has limited amounts of funds in the bank, a state may require the franchisor to include a risk factor on the state cover sheet of the franchise disclosure document [FDD].  For new franchisors or franchisors that have limited amount of funds, a state may require a franchisor to defer initial franchise fees, initial escrow fees, or secure a bond. 

Based on a new policy, California is requiring Franchisors to have additional capital.

However, based on recent comment letters and conversations with the examiners in California, California requires something new.  Based on a new policy, California requires Franchisors to have additional capital.  The amount required is still convoluted.  However, when registering in California, franchisor should plan on having an amount equal to the initial franchise fee in the bank.  Without sufficient funds in the bank, the state of California may refuse the franchise registration application. 

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The New and Expanded Franchise State Cover Page

On May 19, 2019, the NASAA [North American Securities Administrators Association] Membership issued instructions for the new Franchise Disclosure Document [FDD] state cover page.  The state cover sheet is expanding.  It is now 3 pages, not just one.  The pages include:

  • How to Use This Franchise Disclosure Document
  • What You Need to Know About Franchising Generally
  • Special Risk(s) to Consider About This Franchise

The first page, How to Use This Franchise Disclosure Document, is a table with 8 questions in the first column and in the second column, a cross-reference in the franchise disclosure document.  A narrative above tables states the mission of the table. The narrative reads:


Here are some questions you may be asking about buying a franchise and tips on how to find more information:

The question includes:

  1. How much can I earn?
  2. How much will I need to invest?
  3. Does the franchisor have the financial ability to provide support to my business?
  4. Is the franchise system stable, growing, or shrinking?
  5. Will my business be the only [XYZ] business in my area?
  6. Does the franchisor have a troubled legal history?
  7. What’s it like to be [an XYZ] franchisee?
  8. What else should I know?

The next page, What You Need to Know About Franchising Generally, is 7 general statements about franchising on the topics including:

  1. Continuing responsibility to pay fees.
  2. Business model can change.
  3. Supplier restrictions.
  4. Operating restrictions.
  5. Competition from franchisor.
  6. Renewal.
  7. When your franchise ends

The final page, special risk factors page, is kin to the risk factors required by the prior version of the state cover sheet. 

Franchisors must comply with the new state cover page requirements by January 1, 2020.