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Franchise agreements customarily provide that where one of the parties is alleged to have breached, the non-breaching party must notify the breaching party and give an opportunity to "cure."
However, some breaches may go to the essence of the relationship between the franchisee and franchisor. In such an instance, a franchisee who breaches their franchise agreement may find themselves terminated without any opportunity to "cure" the wrongdoing.
The prime example of a non-curable breach is a franchisee who goes into competition with the franchisor.
In one of the early cases, Olin Corp v. Central Industries (1978), the Mississippi-based distributor (Central) short-weighted bags of fertilizer. It then sold that fertilizer to customers and pocketed the proceeds.
The court ruled that the theft went to the essence of the contract.
A recent Pennsylvania case, LJL Transportation v. Pilot Air Freight (2009) involved a franchisee (LJL) of a shipping company (Pilot) who secretly diverted shipments to a company owned by the principals of LJL.
Once again, a court held that such conduct did "directly offend the business agreement between the parties as well as the trust relationship between them" and on appeal the Supreme Court of Pennsylvania agreed.
Franchisees should be aware that setting up a business in competition with their franchisor, or failing to report all sales, may be grounds for immediate termination--without the opportunity to cure-- in some jurisdictons.
Of course, franchisees may respond that franchisors can sell franchises encroaching on their location, can set up entire franchise systems in competition with them, and can get kickbacks from mandated vendors. But for various reasons the courts do not regard such conduct in the same light as franchisee disloyalty, and franchisees need to be aware of the risks they take should they choose to underreport sales or go into competition with their franchisor.
|LJL Transportation v. Pilot Air Freight.pdf||112 KB|