Background
The franchisee had been a franchisee of the franchise system until the expiration of its franchise agreement.
When the franchise agreement expired, the franchisee directors incorporated a new company operating in the same territory undertaking the same work in breach of its restraint of trade obligations under the franchise agreement.
What We Did
The restraint of trade provisions in a franchise can be enforced (provided they are legally enforceable) through a number of different means, including without limitation:
- seeking an injunction from the Court ordering the franchisee to stop breaching the restraint of trade;
- instituting proceedings against the franchisee for breach of contract and seeking an order of compensation for the loss suffered by the franchisor; and
- if a franchisor wishes to seek an injunction, it is something that must be sought from the Court very quickly, for instance, within a matter of days/weeks.
Our client (the franchisor) had waited too long to be able to seek an injunction and that was taken off the table. However, our Client was able to seek damages for breach of the restraint of trade.
Our client wished to attempt to reach a resolution with the franchisee prior to instituting those proceedings and the costs of court proceedings.
As such, we sent a letter of demand / notice of dispute to the franchisee with the view of reaching a settlement agreement but reserving our client’s rights to institute proceedings and seek damages through that avenue.
Outcome
The parties were not able to reach a resolution through the negotiation process and, as such, a mediation was held.
At that mediation, it was made clear that our franchisor-client intended to institute proceedings if an acceptable resolution was not reached.
The franchisee then agreed to pay compensation to our client, which was calculated on the estimated royalties our client would have received had the franchisee not breach the restraint of trade, reimbursement of our client’s legal costs, and a written contractual agreement not to further breach the restraint of trade, failing which, the franchisee agreed to pay further compensation to our client.
Learnings
Our client avoided the expense and uncertainty of litigation. The whole matter was resolved within a couple of months (as opposed to what may have been an 18-month to 2-year court process).
Mediation is a valuable tool as it assists the party in reaching a resolution without the expense, stress, uncertainty and time involved in the court process. Also, if the mediation process has not been attempted, the Court may itself order that the mediation is attempted. By following the mediation process to begin with, at least that avenue is exhausted before any party needs to resort to the court system.
