Liquidated Damages Harm Franchisees

Ramada Worldwide Inc. sued former franchisees in federal court in New Jersey for liquidated damages and damages for past due fees in connection with the premature termination of the franchise agreements.

In Country Inns and Suites by Carlson, Inc. v. Bandera Pointe Hospitality, LP the plaintiff franchisor sued the defendant franchisee in federal court in Minnesota on January 19, 2011for liquidated damages. The franchisee failed to begin construction of the hotel that it was to operate. This constituted a default under the license agreement and the franchisor terminated the license agreement with the franchisee.

Liquidated damages are contractually defined damages to be paid to a party upon the early termination of the contract by the other party. Liquidated damages provisions are often enforceable, but not always. Even when they are enforceable, however, a former franchisee may be in a position to negotiate over the amount of those damages or to negotiate them away completely if, for example, the former franchisee has claims against the franchisor.

A former franchisee, or a current franchisee planning to end its relationship with the franchisor prior to expiration of the franchise agreement, subject to a liquidated damages clause should seek advice from a franchise lawyer about its options.