Like all business ventures, franchises are governed by contracts from franchise agreements to employment contracts to supply deals with vendors. Although contracts are designed to be legally binding plans outlining the business to be done in no uncertain terms, these contracts are sometimes broken, potentially damaging your bottom line. In North Carolina, franchise contract disputes can cause permanent damage to your company, its reputation, and also have significant legal expenses through litigation with an experienced attorney who works with existing franchisors.

Defining a Breach of Contract Claim for North Carolina Franchisors

A breach of contract claim requires that there is a valid contract that both parties entered into and that one party failed to perform its duties under the contract. Every franchise relationship is based on a franchise agreement that dictates the rights and responsibilities of the franchisee and franchisor. If any of those responsibilities are not performed, or if one party’s rights are violated, there may be grounds for a lawsuit or termination of the contract.

Contracts can be breached by both the franchisor and franchisee. On the franchisee side, the common breaches are if the franchisee stops paying royalties or marketing fees to the franchisor or withholds any type of required payment to the franchisor. On the other hand, franchisors are required to provide a certain level of support to their franchisees. The level of support required is laid out in plain English in the franchise agreement.

Types of Franchise Contract Breaches

Good Faith in Franchise Agreements

The duty of good faith and fair dealing is an implied covenant that is present in every contract. It is not actually written in the terms of the contract, but it is usually implied by state law and should be accounted for in every franchise agreement. Both parties in a contract are supposed to act in good faith, meaning that they are supposed to act honestly and fairly to benefit both parties to the contract. Even if there is no direct violation of the contract, there may still be grounds to sue if one party did something that was simply wrong or in bad faith.

Substantial Performance in Contracts

Substantial performance is a standard in most states for determining damages when a breach of contract has occurred. If one party substantially performs everything that they are supposed to do under their franchise agreement, then damages may be minimal or nonexistent. If one small portion of the franchise agreement is violated, the wronged party may only be able to recover compensation commensurate to the severity of the violation, but if the majority of the contract is breached, there is a chance they could recover all the money they put into the business venture. If most of the contract’s obligations are met, the party may be said to have substantially performed. That small missed obligation would likely be considered a minor breach.

What are Material Contract Breaches?

A material breach, sometimes known as a fundamental breach, is when one party has failed to perform the obligations that are at the heart of the contract. A franchise example would be when a franchisor accepts the initial franchise fee and trains the new franchisee, but then the franchisee chooses to not open the business. This violates the very core of the franchise agreement and the franchisor would likely be able to recover its actual damages.

Legal action is almost always required when a material breach of contract has occurred. Taking legal action as a franchisor during this type of contract dispute will protect the value of the franchisor’s brand and, ultimately, the value of every franchisee’s business in the network. However, this does not mean that every case requires a lawsuit, and it may be wiser for some franchisors to seek alternative dispute resolution such as arbitration or mediation.

What is an Anticipatory Breach?

An anticipatory breach occurs when one party informs the other party of its intent to breach the contract. This often occurs when a franchisee states that they will be breaching some portion of the contract in the near future, usually terminating a franchise agreement before the agreed-upon term ends.  If a franchisee legitimately notifies the franchisor of its intent to close its franchised business, this would usually be considered an anticipatory breach depending on the level of sincerity in the notification.

After there is adequate reason to anticipate a breach of the franchise agreement, the franchisor may not have to support the franchisee any further. It is essential to consult with a franchise attorney to analyze every potential anticipatory breach of a franchise agreement. It may be difficult to discern if certain language or actions could constitute an actionable anticipatory breach of contract in a North Carolina franchise dispute. Minor disputes might be resolved, but major breaches will often end a relationship and an experienced franchise attorney may be necessary to help discern the two.

Steps You Can Take to Avoid Breaches of Franchise Contracts

By working closely with your franchise attorney as a partner in your franchise business venture, you can stay on top of all of your contractual obligations while protecting yourself against breaches that could hurt your brand. It is essential to know the terms of your franchise contracts and what those terms mean for you from the very beginning of the franchise relationship. For your franchise business in North Carolina, a franchise contract disputes lawyer could be the ally you need to protect the future of your franchise business and protect your existing revenue streams. Call us today to schedule a consultation.

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