Monday May 31 2021

General publication

How To End A Franchise Agreement With An Indeterminate Term.

Often, individuals with a great passion, or that are gifted with a specific skill set will find themselves with great ambition. It is not uncommon to see businesses or organizations spring to life as a result of such ambition along with the desire to express such gifts, all while turning a profit all at the same time. What to do, however, if you lack the resources, the skill set, or business acumen to fulfill such dreams? In some instances, the better course of action may be to join an already existing Franchise to benefit from an established banner, reputation, product, and ways of operation. This is beneficial due to the fact that you may be placed in a position to learn all the lessons without necessarily making the mistakes, as they have already been made, and remedied. 

After learning and operating as a Franchisee for a few years, you may find yourself ready to start your own business venture in the same field. Evidently your concepts, designs and ideas will be unique to you and only you, and you will find yourself scouting for locations, scouting for staff, approaching suppliers and, when it is time to exit the franchise, you find the Franchise agreement silent as to when the agreement is to come to an end and void regarding mechanisms to end it.  

Are Franchise agreements without an end date a perpetual?

There are no guiding principles in Franchise law that clearly state whether a franchise agreement should or should not be perpetual. In fact, the guiding principle remains that the contract is the law that governs both parties. As such, common practice amongst Franchisors is to include a start and end date, with an option to renew. 

In some cases, the contracts include a unilateral renewal clause that is dependent solely on the willingness of one of the contracting parties that, ultimately, can be interpreted as a clause that grants a possibility of perpetual renewal. This begs the question once again - can a Franchise agreement last forever? 

While the law, as it stands today, allows contracting parties to foresee a specific duration for these types of agreements, there are, in fact, certain legislative limitations. The law as it stands today is of the position that so long as the nature of a perpetual agreement does not contravene public order or is not expressly prohibited by the law, a perpetual contract is legal in Québec. 

Interestingly, there are other types of contracts that foresee a specific start date but have no end date, nor do they specify terms for renewal. These contracts are called contracts with an indeterminate term. In these contracts, the parties agreed to not specify, or simply omitted to specify, when their agreement would come to and end. Nevertheless, there are ways to terminate these types of contracts.

How to terminate an agreement with an indeterminate term? 

An agreement with no end date can be ended at a time of your choosing. That being said, you must act diligently and in a reasonable matter. In other words, you must provide reasonable notice to the Franchisor to provide them with an opportunity to act. For instance, to find new buyers, new partners, or develop an internal strategy regarding a location closing. 

What is a reasonable notice? 

To determine the reasonable nature of a notice is a purely factual exercise. Factors that may be considered are: the duration of the agreement; the success or lack thereof of your location; the Franchise agreement; the implicit will of the parties; and so forth. The objective of such a notice essentially comes down to anchoring and promoting fair but competitive business practices.

What if the franchisor and I cannot agree on the duration of such a notice? 

Negotiations are often the medium used to settle such disputes. Unfortunately, if the parties are unable to come to an understanding or a compromise, a choice needs to be made. You may decide to offer your notice and terminate once the delay has lapsed. This would place the next steps in the Franchisor’s hands as to whether they will decide to sue you for damages and attempt to argue and prove the unreasonable nature of your notice.  You could also offer a monetary compensation to your Franchisor, if he accepts it, this could ease his potential objection to a shorter notice. 

Another option, however, would be to go before a judge and request from the court that it set an end date to the Franchise agreement by fixing a determined term by taking the nature of the contract, the intention of the parties, and the terms of the contract itself into consideration. This judicial avenue is the most objective and secure method to proceed, but it is also more costly. 

What is most important to consider is that a contract does not bind you forever unless it is your intention for it to do so. In the absence of a clear and explicit display of the parties’ intention to be bound by a contract forever, you may free yourself of such a contract by acting diligently, providing reasonable notice, and by considering such a possibility when contracting in the first place. 

Emmanuel Kouzelis, Attorney-at-Law

With the collaboration of Laurence Douyon & Michael-Peter Garios, Articling students

Alepin Gauthier Avocats Inc.

This text contains legal information of a general nature and should not replace legal advice with a lawyer or notary who will take into account the particularities of your situation.