A recent case involving a contractual dispute between a franchisor and franchisee (a fairly common situation) highlights the need both to consider contractual terms carefully and to take advice before acting when a dispute arises.

The nub of the issue was that the franchisor was considered by the franchisee to be trying to impose unreasonable terms. The franchisor ran a business (eTyres) which took orders over the Internet for tyre fitting which it then referred to its franchisees, making a deduction from the payments received for so doing. The franchisee was a tyre fitter who had a substantial business outside the eTyres fitting business.

The franchisor sought to require the franchisee to change the livery of its vehicles and, in effect, to make eTyres the franchisee’s trading style, which the franchisee felt would have been to the detriment of its business generally.

The franchisee alleged that the franchisor had made deductions from the sales receipts which were greater than was allowed under the franchise agreement.

Because of these factors, the franchisee determined to set up in competition with eTyres. When the franchisor found out about this, it terminated the franchise agreement and sought an injunction against the franchisee.

The questions before the court were whether the franchisor had made excessive deductions (which involved more than one issue) and whether the franchise agreement would allow the franchisor to require the franchisee to change its trading style.

The court took the view that the basis of calculation adopted by the franchisor was justifiable, but making deductions in excess of the percentage stated in the franchise agreement was not. The franchisor could not compel the franchisee to change its trading style for its whole business. The actions of the franchisor amounted to a repudiation of the original agreement and the franchisee was therefore entitled to have the injunction discharged and to have its counterclaim allowed.

San Chima says, “This is a case which clearly arose because each party had different ideas about what the franchise agreement meant and these were not resolved. Franchise agreements are often the cause of difficulty and it makes sense to ensure that legal advice is taken and any areas of possible disagreement are ironed out before you commit yourself.”