Buying a franchise: your rights when the franchisor falls short

When you buy a franchise, you join a network in which both parties need to fulfil their commitments. But what happens if the franchisor fails to deliver what you have agreed? Before signing, look not only at what you should receive, but also at how you can require problems to be put right. A clearly defined obligation is considerably more useful if the agreement also explains what happens when it is not met.

Distinguish between dissatisfaction and breach of contract

A poor month’s sales do not automatically mean that the franchisor has breached the agreement. You run an independent business and bear the commercial risk. However, a failure to deliver something agreed may constitute a breach of contract — for example, if an explicitly promised service is not provided at the agreed time.

Start by identifying the franchisor’s specific obligations. Then check which of them have a clear deadline, scope or quality standard. Wording such as “ongoing advice” can be harder to hold the franchisor to than a precisely defined commitment.

Draw up a simple checklist for each business-critical obligation:

• What exactly must the franchisor do?
• When must it be done?
• How can you demonstrate that it was not done, or was inadequate?
• Which clause sets out the consequences?

The aim is not to anticipate every possible dispute. It is to spot whether the agreement places detailed demands on you while leaving the franchisor’s responsibilities and the consequences of any failures unclear. In a well-functioning franchise network, both sides need to be held accountable.

Understand the protection Swedish law provides

Sweden has a specific Act (2006:484) on franchisors’ disclosure obligations. It requires franchisors to provide clear, comprehensible written information about the implications of the agreement and other relevant matters in good time before it is concluded. This information must cover, among other things, the financial terms, termination conditions and how disputes will be resolved.

However, the Act does not comprehensively regulate the parties’ rights when something goes wrong during the relationship. It provides no general guarantee of the franchisor’s performance or your profitability. Nor should you assume that the disclosure obligation itself gives you an automatic right to a refund following a later breach of contract.

The franchise agreement and general rules and principles of contract law are therefore central. The Swedish Contracts Act may, for example, be relevant when assessing unfair terms. However, you should not base your investment decision on the possibility of having a term adjusted or set aside: the assessment depends on the circumstances, and commercial agreements must be taken seriously.

As a prospective franchisee, you will normally enter into the agreement for business purposes, not as a consumer. You should therefore not expect a consumer cooling-off period or the protections that apply to consumer purchases. Ask a lawyer to assess the rights you actually have under your particular agreement and the applicable law.

Check the process from notifying a breach to putting it right

Look for clauses explaining how you must report a breach of contract. The agreement may specify a particular recipient, a required method of communication or deadlines. A verbal discussion with your contact person may not satisfy the agreement’s formal notice requirements.

Ask the franchisor to explain how a specific case would be handled: an agreed service from head office is not delivered, you raise the issue and nothing happens. Who receives the notice of breach? When must the franchisor respond? By when must the problem be resolved?

In particular, check whether the agreement distinguishes between:

• acknowledging receipt of the notice of breach,
• providing an action plan,
• actually putting the problem right within a specified or reasonable period.

An obligation merely to discuss a problem is not the same as an obligation to fix it. Also check how recurring failures are treated. If each new incident starts an entirely new process for putting things right, it may be difficult to make progress on a repeated problem.

Negotiate a workable procedure. It should allow you to document the failure and specify what needs to happen for it to be considered resolved. For urgent problems, the usual period allowed for remedying a breach may be insufficient; ask whether the agreement permits temporary measures and who can authorise them.

Assess whether the remedies work in practice

The next question is what you can do if the problem is not put right. Check whether the agreement provides for remedies such as a reduction in fees, an alternative service or the right to take temporary action. Do not take these options for granted: the conditions under which they are available need legal review.

Do not stop paying fees on your own initiative without taking advice. If you withhold payment without sufficient legal grounds, you could put yourself in breach of contract, even if your original complaint is justified. The same applies if you buy a replacement service and unilaterally deduct the cost from the next invoice.

Ask your lawyer to check whether any clause makes a particular remedy your only option. Also examine whether other clauses effectively restrict that right, for example through very short deadlines for notifying breaches or extensive exclusions of liability.

Then test the agreement against a realistic scenario. Can you get a problem resolved and continue trading, or is a costly dispute your only remaining option? For someone investing in a long-term business relationship, an effective process for putting things right is often more useful than simply having the option to leave.

Practical takeaway: Do not sign until you can trace a clear path from identifying a failure to notifying the franchisor, having it put right and seeking a possible remedy. Ask for a legal review wherever a step is missing.