franchise termination

[yojumitu]

i bought a franchise last year for 14k. the agreement was for 10 years. I closed the business after 6 months.the franchise agreement stipulates paying the franchise management service charge of 15% on gross sales. The termination clause does not allow for franchisee to terminate agreement.

Now they are asking myself for damages, i.e, money they have lost over the balance of term, 9 and half years. They are projecting/forecast damages in tens of thousands. Is this justifiable. They have taken me to County Court Claim over this?

 

please help.

[Hobbie]

Seek professional legal advice.

[letitbeme]

Hi, I agree with hobbie – you will need to speak to a lawyer that is conversant with contract Law. But out of curiosity can I ask you a few questions. Your answers might clarify the predicament that you now find yourself in and may contribute to a counter claim in the courts.

 

• I assume that you closed the business due to its none success?
  
• Did you follow the franchise advice in relation to the running of the business?
  
• Did the franchise state that they would help you build up your business and did they?
  
• Did you seek legal advice before you signed the agreement?
  
• Did they meet all of there contractual obligations as outlined within the agreement?
  

 

Regards LIBM

[yojumitu]

Hi, I agree with hobbie – you will need to speak to a lawyer that is conversant with contract Law. But out of curiosity can I ask you a few questions. Your answers might clarify the predicament that you now find yourself in and may contribute to a counter claim in the courts.

 

• I assume that you closed the business due to its none success?
  
• Did you follow the franchise advice in relation to the running of the business?
  
• Did the franchise state that they would help you build up your business and did they?
  
• Did you seek legal advice before you signed the agreement?
  
• Did they meet all of there contractual obligations as outlined within the agreement?
  

 

Regards LIBM

I lost motivation and confidence in running this business.

they help me in initial stages, but then left me on me own.

No, i did not seek legal advise

They missed my first payment to my bank account and got 2nd one wrong amount.

[nicklea]

Hi,

 

I was in a similar situation to you with the "expectation losses" from a franchisor. They tried to bankrupt me but it didn't work.

 

It's a bit too late now to go into details, but don't worry, I've been in your exact situation and fought them off. A lot will depend on the exact wording of the franchise agreement and exactly what the terms regarding the termination actually say.

 

I'll speak to you tomorrow, I'm knackered now.

 

FOrgot to say - and this is important - was the business a sole trader or limited company?

[nicklea]

ok,

 

If you've actually got a blue form sent to you from the court then it si VERY important that you respond in time. YOu have 19 days from the date on the front of the form to acknowledge service. You can do this online and instructions on how to do this are in the form that you got. You want to say that you are defending the whole amount.

 

If you do not do this on time then they can get a default judgement and that means you've lost.

 

You will then have 33 days from the date on the front of the form to send your defence to the court.

 

It would help a lot if you could type up what is written in the box called Particulars of Claim (leaving out any personal details of course).

 

It would also be helpful if you could type up (or if you don't want to then send it to me as a private message) the exact wording of the terms of the agreement that allow them to charge this and how it is to be calculated.

 

I will also need to know if you went into this business as a sole trader or a limited company and, if it was a limited company, is the claim being made against the company or against you personally.

 

Once you've done this I should be able to give you some (hopefully) helpful advice

[yojumitu]

ok,

 

If you've actually got a blue form sent to you from the court then it si VERY important that you respond in time. YOu have 19 days from the date on the front of the form to acknowledge service. You can do this online and instructions on how to do this are in the form that you got. You want to say that you are defending the whole amount.

 

If you do not do this on time then they can get a default judgement and that means you've lost.

 

You will then have 33 days from the date on the front of the form to send your defence to the court.

 

It would help a lot if you could type up what is written in the box called Particulars of Claim (leaving out any personal details of course).

 

It would also be helpful if you could type up (or if you don't want to then send it to me as a private message) the exact wording of the terms of the agreement that allow them to charge this and how it is to be calculated.

 

I will also need to know if you went into this business as a sole trader or a limited company and, if it was a limited company, is the claim being made against the company or against you personally.

 

Once you've done this I should be able to give you some (hopefully) helpful advice

 

 

please refer to attached files- particulars of claim, please advise.

I have appointed a counsel.

AR-M300_20080612_110515.pdf

AR-M300_20080612_110534.pdf

AR-M300_20080612_110559.pdf

Edited June 12, 2008 by yojumitu

[yojumitu]

please refer to attached files- particulars of claim, please advise.

I have appointed a counsel.

I was trading as a SOLE TRADER

[nicklea]

ok,

 

It would have been an extra argument if it was for a limited company and they were going after you personally as you could have used the Unfair Contract Terms Act. But as it is you will just rely on the common law regarding penalty clauses.

 

Your defence is basically that the term is a penalty clause and so unenforceable.

 

First of all, some other small (or not so small things). They say that the average monthly turnover was £3947. What you will need to say is that actually your turnover in month 6 was £x (which I presume was a lot lower) and that there was no reasonable expectation of that amount increasing, so any claim for damages should be based on your actual figures, not some "average" that they've come up with.

 

They also say that the total amount claimed is based on a 15% fee over 30 months. Well, 15% of £3947 times 30 months comes to £17,761 which is an awful lot less than the £67,497 that they're claiming.

 

 

With the penalty clauses, it probably isn't necessary to rehearse the whole history of penalty clauses for the court but, if you're interested have a read of paragraphs 11 to 15:-

 

Cine Bes Filmcilik Ve Yapimcilik & Anor v United International Pictures & Ors [2003] EWCA Civ 1669 (21 November 2003)

 

There is a case that is very relevant to your case and it is the case refered to above:-

 

Cine Bes Filmcilik Ve Yapimcilik & Anor v United International Pictures & Ors [2003] EWCA Civ 1669

 

 

 

So, a suggested starting point for a defence would be something like this:-

 

1) I submit that term xx (I can't see what number it is) of the agreement that purports to allow the Claimant to bring this claim is a penalty at common law and so unenforceable.

 

2) Under the Agreement I was the sole person that was able to operate the Claimant's business in the Territory. The Claimant gave up it's rights to market and operate it's business in the territory for a period of five years in return for a payment from myself of £14,000.

 

3) As a result of the termination of this agreement it is admitted that the Claimant has lost the Management Service Fee it would have received. However, also as a result of the termination of the agreement, the Claimant has had it's proprietary rights to operate it's business in the Territory restored to it.

 

4) Having given up it's rights to operate it's business in the territory for 5 years in return for a payment of £14,000, the Claimant is now in the position that it has got those rights back after just 6 months.

 

5) The Claimant is in a position to resell those rights once more for another £14,000 just 6 months after receiving £14,000 from myself.

 

6) The Court of Appeal has held, in the case of Cine Bes Filmcilik Ve Yapim Click v United International Pictures [2003] EWCA Civ 1669 ("Cine"), that in determining whether provisions were a penalty the court had at the outset of its enquiry to look at the aggregate amount that would be payable on breach under the terms of the agreement, and compare that with what would have been payable if the Claimant had had to bring its claim under the common law. In other words the alleged genuine pre-estimate of loss had to relate to the overall net balance of losses payable on termination less any benefits that the Claimant had received as a result of termination.

 

7) Mance LJ said in the Cine case:-

 

[21] "The present contract is more complex in nature than a loan. Its termination did not just leave the respondents out of pocket. It restored proprietary benefits which the respondents thereby became able to exploit, for whatever worth they might have."

 

"But the critical point is that the innocent party's actual loss in such a case is a single "net" amount derived by drawing a balance sheet (cf Chitty on Contracts, 28th Ed. Vol. 1, para. 27-001). On the one side are benefits lost and on the other side benefits received by reason of the termination."

 

[27] "..any genuine pre-estimate of actual loss would have to relate to the net overall balance, not to the amount of a single component."

 

8)8 ) The Cine case was referred to in the case of Murray v Leisureplay Plc [2005] EWCA Civ 963 where Arden LJ said:-

 

[46] "In paragraph (a) Lord Dunedin refers to the sum stipulated in the parties' contract being "extravagant and unconscionable". The decision of this court in the Cine case shows that those words have to be given a contemporary meaning. The real question is whether the sums for which the parties have provided the paid on breach differ substantially from the sums that would be recoverable at common law and whether there is shown to be no justification for that."

 

9) I submit that, following the authority of the Cine case, that the term of the agreement that the Claimant is relying on does not take account of the benefits that it has gained on termination of the contract and is therefore a penalty.

 

10) Notwithstanding that the term is a penalty, I further submit that the calculation used to detemine the amount that is allegedly owed is incorrect. My turnover in month 6 was £x. 15% of this amount is £y and so 30 months of payments of £y would be £z. In addition, as the contract has been terminated then the Claimant does not have to fulfill it's obligations in return for the Management Service Fee. I therefore submit that any amount that might be claimed should be net of the costs that the Claimant would otherwise have incurred in return for the Management Service Fee rather than the gross amount of the Fee

Edited June 13, 2008 by nicklea

[yojumitu]

Thanks a lot for the effort you have u have put for me. I have appointed a counsel to put forward a defence.Should I give him a print out of this article or wait for his draft of defence and give him then. The franchisor (Claimant) is a BFA full member. Should i write to them as well.?

[nicklea]

Hi,

 

You are paying your solicitor for his time in researching a case for the defence. Giving him what I put in the above post may well save him some time and so make it cheaper for you.

 

The points numbered 1 to 10 above are essentially the points that I relied on when I had to do it by myself - and I was successful.

 

To be honest I don't know how helpful the BFA would be.

 

If I can think of anything else I'll let you know and if you need any help or support then just shout.

[yojumitu]

Thanks v much, NICklea, you have been very helpful, I shall pass it on to my solicitor. Also can i send u the copy of the defence once its drafted.

 

I want to nail this aggresive and deceitful company. Its my hard earned money they are playing with and scaring me off.

Any more info u can give be appreciated. My defence has to be in by 28th june.

[yojumitu]

I need help with this case. the solicitor fees are mounting!!!!

[nicklea]

I know what you mean - believe me!

 

I work very early mornings so I'm just about to have some supper and I'm off to bed shortly. Post any questions you've got and I'll try to help tomorrow.

[Hobbie]

I have appointed a counsel.

 

Appointing counsel the fees will raise, no point in getting a advocate or barrister involved this early on, and unless you used an "Open Access" one your solicitor shouldn't of even mentioned it unless the case went to the higher courts.

[yojumitu]

what clauses in the franchise agreement make it liable for a franchisee to pay damages to franchisor if the franchise business is closed down before expiry of agreement.? are these terms unfair?

 

Please advise.

[nicklea]

Hi,

 

It will be written in to your contract. You will have to read the actual terms of your contract to see which term (or terms) it is that says that they can do this.

 

As to whether it is unfair, the Unfair Contract Terms Act is largely concerned with excluding liability for negligence so it doesn't really apply.

 

There is a section that could have been used if the business were a limited company and you had signed a personal guarantee. However, as that isn't the case, that section doesn't apply.

 

My suggestion as to what your defence should be is that the term that allows them to do this is a penalty and so it is unenforceable as I mentioned in my post above giving a suggested defence.

[yojumitu]

My counsel/barrister has drafted a defence. He has suggested a part 36 offer to be made with the defence. There is no mention of penalty clauses or liquidated damages in the franchise agreement so he has not taken that into account. I am confused what to do.

 

Should I make part 36 offer.? And if so, then what is the reasonable offer.? He has given me option to counter claim but i am of limited financial means, I do not wish to go to trial, cos its gonna get messy and v v expensive for me.Whats my final straw in the hat?. How can i end this mess?

 

PLEASE ADVISE/HELP

[nicklea]

My counsel/barrister has drafted a defence. He has suggested a part 36 offer to be made with the defence. There is no mention of penalty clauses or liquidated damages in the franchise agreement so he has not taken that into account. I am confused what to do.

 

It would be helpful to know what the main points of the defence are. By the way, can I ask you why you have gone to a barrister rather than a solicitor? I believe that is a much more expensive option.

 

Terms of a contract will not be called "penalty clause" - that would be a dead giveaway that it was a penalty!

 

What the term will say is something like...

 

If the Agreement is terminated following default by the franchisee then the franchisor shall be entitled to claim xxxxx (whatever it is)

 

This sort of clause is pretty standard in franchise agreements so I would be surprised if it wasn't in your agreement.

 

This is the clause that is a penalty - it won't be called a "penalty" but that is what it is.

 

To be honest with you, I am surprised that a solicitor didn't raise this issue - maybe he doesn't know very much about penalty clauses?

 

I really would strongly suggest (although I am just an ordinary person - not legally qualified) that you do include the penalty clause issue in your defence. I was in exactly the same situation as you are now and it worked for me.

 

Should I make part 36 offer.? And if so, then what is the reasonable offer.?

 

Only you can make that decision.

 

You can read here about part 36 offers:-

 

PART 36 - OFFERS TO SETTLE

 

If you want to make a part 36 offer it would need to be reasonably close to what they might expect to get if they were to win. See here for some advice and you can also google the term:-

 

Part 36

 

 

He has given me option to counter claim but i am of limited financial means, I do not wish to go to trial, cos its gonna get messy and v v expensive for me.Whats my final straw in the hat?. How can i end this mess?

PLEASE ADVISE/HELP

 

 

What would be the grounds for the counter claim? Depending on what the counter claim is, you may be able to add it to your defence as a right of set-off. In this case you won't have to pay any fees as you are not counter claiming.

 

Again, I am surprised that a solicitor did not suggest that to you.

 

 

Hope this helps

[yojumitu]

There is no such clause in my agreement

 

"If the Agreement is terminated following default by the franchisee then the franchisor shall be entitled to claim xxxxx (whatever it is)".

 

The claimant is claiming repudiatary damages as per my solicitor's viewpoint. This is due to the effect that i did not fulfill the agreement to its potential. I started work in employment and so was not able to perform the business to its full potential. Please read the attached Claim form in this thread that was posted on 12th june.

 

Please advise/Help.

 

My solicitor has suggested to put forward a part 36 offer with the defence?. what if they refuse this offer?. where do i stand?

[yojumitu]

There is no liquidated damage clause in my agreement.

[Goldlady]

I have just come across this thread and wondered what the outcome was?

 

I am fighting with some friends against a High Court Injunction after they terminated a franchise and am looking around for help.

[nicklea]

Hi Goldlady,

 

I don't know about this poster, but the advice I gave in this thread certainly worked for me and also for a friend of mine who was in a similar situation with another franchise company.

 

Also, trading through a limited company rather than as a sole trader I found it gave me some extra arguments

 

regards

 

nicklea