Liquidated Damages Provision Franchise Agreement

The New York court decision removes important parts of the employer`s new common standard, which affects franchise relationships Inherent in the franchisor-franchisee relationship, there are certain violations that cause economic harm to the franchisor. However, the amount of damages can be difficult to determine at the time of entering into a franchise agreement. For example, if the franchisee discloses the franchisor`s trade secret to a competitor in a franchise agreement containing the above clause, the franchisee has breached the franchise agreement and effectively destroyed the value of the trade secret. Franchisees: Acknowledge that a possible lump sum clause in your franchise agreement may expose you to significant liability if the franchisor prevails. When negotiating your franchise agreement, discuss penalties with your franchise lawyer and try to limit your financial obligations and the accumulation of royalties and other fees after an alleged failure and termination of the franchise agreement. More and more franchisors include lump sum damage clauses in their franchise agreements. Potential franchisees should be extremely cautious about such clauses, but should stifle any sigh of relief if their franchise agreement doesn`t have one. Indeed, the absence of a lump sum damages clause does not mean damages. Disclosure of financial performance statements in franchise disclosure documents During the COVID-19 pandemic In North Carolina, a lump sum indemnification clause in a franchise agreement alone does not guarantee that the franchisor will receive the specified amount.

In the event that the franchisee refuses to pay the amount due and a dispute arises, the clause must also be enforceable in court. Whether this clause is enforceable varies from state to state. However, the courts will generally consider whether the parties intended to pay damages; The amount of financial damage that the infringement would cause was difficult to determine and the amount of lump sum damages was a reasonable estimate of the actual financial damage that an infringement would cause. So, what franchisors, franchisees, and licensees need to know: Buying a primary franchise is a completely different offer than buying a franchise. Read more The typical franchise agreement is representative of the disproportionate bargaining power between franchisor and franchisee. This means that franchise agreements favour franchisors. Such a favourable clause, contained in the franchise and licence agreements, refers to lump sum damages. Franchisors: For franchisors, liquidated damage provisions are essential elements of your franchise agreement and are an important tool when faced with disputes between franchisees. If you include lump sum damages in your franchise agreement, make sure that the method of calculating damages is not arbitrary, based on tangible factors, and is not incompatible with your licensing structure. In a lump-sum damages clause, the parties to a contract determine the pecuniary damages or specify the pecuniary damages to be paid to the non-injured party in the event of early termination.

Under a franchise agreement, the “non-offending party” is always the franchisor. There is never a mutual provision that entitles the franchisee to lump sum damages. Franchisors like indemnification clauses for a number of reasons, but mostly because they can avoid lengthy and costly litigation (including discovery, expert opinions, etc.). Franchisees and their lawyers hate such clauses because they see them as unilateral and very harsh measures that really only benefit the franchisor. In fact, some states, such as Minnesota, are not special fans of the lump sum damages provisions in franchise agreements and make them illegal. However, sometimes a lump-sum indemnification provision requires the franchisee to pay all remaining royalty payments due during the remaining term of the franchise agreement. But such a draconian provision can be difficult to enforce, and the industry standard seems to be the multiple royalty formula. Lump sum damages are a form of financial compensation that the parties accept when concluding a contract. A lump sum clause in a franchise agreement generally sets out the circumstances in which an infringing party is required to pay lump sum damages, the amount due and the terms of payment. As such, the purpose of this type of clause is to ensure that the non-infringing party is financially compensated for the damage caused by the breach. This clause usually looks like this: the typical franchise agreement contains a lump-sum indemnification provision in which the franchisee agrees to pay a fixed amount or an amount based on a fixed formula as damages in the event that a court finds a breach of the franchise agreement. If the franchisor wins a lawsuit against a franchisee, the lump-sum compensation provision may open the door for a court (without further investigation) to award significant financial damages.

Similarly, licensees may be subject to serious damages when dealing with trademark licensing agreements based on the lump sum indemnification clause contained in the license agreement. Many franchisees relax when they learn that their franchise agreement does not include a contractual penalty clause. Maybe too much. A franchisor can still sue a franchisee for future lost profits or royalties in the event of early termination due to a franchisee`s breach, even if there is no provision for lump sum damages. This usually lengthy process can even cost the franchisee more than they could have paid under a lump sum clause. And it will almost certainly take more time and energy. Therefore, you need to fully understand the extent of your potential damages as a franchisee, whether or not your franchise agreement contains a lump sum damages clause. Either way, it`s a bit troubling to look at the barrel of a lump sum clause, and its application can be financially ruinous.

As a result, many franchisees against whom a lump sum damages clause is exercised will question its applicability. In a recent case ruling in favor of the franchisor, a North Carolina federal court, applying Maryland law, upheld the lump-sum indemnification clause in Choice Hotel`s franchise agreement, which provided for damages based on a royalty multiplier for the remainder of the franchise agreement (subject to a 36-month cap and a minimum limit of $40.00 per the number of “tenants” Room”). because: New FASB standards for revenue recognition for delayed franchisees Within 30 days of the termination of this agreement by the franchisor, the franchisee must pay the franchisor as a lump sum compensation and not as a penalty an amount equal to three (3) of the royalties payable either (i) during the last twelve (12) months of the franchisee`s active activity, or (ii) the entire period during which the franchisee has been in business, whichever is shorter. .