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Legal Solutions for Franchisor to Recover Unpaid Franchise Royalty fees: Lawyers Advice on Franchise Business in India | Franchise Lawyer in Delhi NCR | Franchise Law Firm in Delhi NCR | Franchise Business Attorney in Delhi NCR | Franchise Business Attorney in India

Best and Experienced Lawyers online in India > Corporate Lawyer  > Legal Solutions for Franchisor to Recover Unpaid Franchise Royalty fees: Lawyers Advice on Franchise Business in India | Franchise Lawyer in Delhi NCR | Franchise Law Firm in Delhi NCR | Franchise Business Attorney in Delhi NCR | Franchise Business Attorney in India

Legal Solutions for Franchisor to Recover Unpaid Franchise Royalty fees: Lawyers Advice on Franchise Business in India | Franchise Lawyer in Delhi NCR | Franchise Law Firm in Delhi NCR | Franchise Business Attorney in Delhi NCR | Franchise Business Attorney in India

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Franchise agreements benefit the franchisees by providing with well established recognition of the business. But there is a price to pay quite literally. The initial license fee is paid along with regular royalty fees which can be weekly, monthly quarterly or even yearly that depends upon the mutually decided term.

Four legal steps to be taken by the franchisor on default of royalty payment:
The following steps should be undertaken to recover unpaid franchising royalty fees in case of default by franchisee:
Negotiation should be the first step to approach the problem of default of royalty payment. The problem needs to be addressed first so that both parties can get a clear stance of the situation.
Notice to remedy is issued by the franchisor. The breach notice is proposed to give a reasonable time period for remedy of the default in hand which should not exceed the stipulated time period. And if the breach is remedied, the franchisor cannot terminate because of that breach. But, if the breach is not remedied the franchisor can terminate. The franchisor may initiate proceedings to recover unpaid royalties plus interest.
Termination without notice is a step undertaken by franchisors to terminate the franchise agreement without notice in special circumstances including the case of bankruptcy or insolvency, voluntarily abandonment of the business, franchisee convicted of a serious offence, business endangers public health or safety etc.
Mediation can be done to settle the dispute between the Franchisors and Franchisees. Either of the party may issue a Notice of Dispute, which sets out the nature of the problem; the outcome they want and what action they think will settle the dispute. Party may refer the matter to a mediator or a mediation adviser for settling the dispute.

Recovering future royalty fees after termination of the franchising agreement
After facing irregularity of royalty fees by the franchisor, the franchisor terminates the franchising agreement. There have been different stances of the Court on dealing with the subject matter of future profits and whether the franchisee is liable of paying it to the franchisor.

In the leading case of California Postal Instant Press, Inc. v. Sealy 43 CAL APP 4 1704 (1996), the Court held that a franchisor could not recover lost future royalties or advertising fees after it terminated a franchisee in spite of the fact that it was due to franchisee’s default on the payment of royalty caused the termination. As the franchisor terminated the agreement, it waived the right to future royalties and fees.
It is also pertinent to note that California Court seemingly ignored the fact that the franchisee terminated the franchise agreement due to the failure of payment of past royalties; most observers concluded that the Sealy decision would always remain unique to California law

In the other case of Radisson International vs. Majestic towers 488 F(SUPP) 2d 953 (2007), the findings of the case were similar to that of Sealy’s, but the Court held that as the unpaid royalty recovery had been added to the clause of the agreement. The franchising license was cancelled due to unsettled position of recovery of royalty. The franchisee relied on Sealy but the Court side-stepped the judgment and upheld the clause mentioned in the agreement.
In conclusion, the Radisson decision and other cases suggest that Courts are now more agreeable to enforce specific damages clauses as long as those clauses provide for termination due to the franchisee’s default on the specific subject matter and they should contain a reasonable and specific way of calculation related to the lost profits the franchisor is likely to bear in the event of franchisee’s default.

Termination entitled if not present for the proceedings: In the case of Subway Systems vs. Mr.Vasanth Venkateshwaran O.P 17 of 2018 the Arbitrator appointed by International Centre for Dispute resolution passed a reasoned and well considered award which was upheld by the High Court. Despite several opportunities given to the respondent failed to pay the royalty fee which was a breach of the agreement along with failure to be present for the proceedings. The franchisor was permitted to terminate the agreement.
Conflict of Profit Restructuring and resolving the issue: In December 2018, Multiple Domino’s franchisees declared that franchisor needs to restructure the franchising costs i.e. the royalty fees along with profit model. The stronger arrangement should be established between both the parties. To aid in this, franchisors can provide best practices on how to increase sales and streamline internal operations to increase profits, while franchisees should be ready to share concerns whenever they need help to show they’re invested and want to hit their goals. Along with this technology will aid both the parties such as Point of Sale (POS) and employee scheduling software. Franchisors will be a part of management then and will be able to provide for specific guidance. This will improve the performance in corporate level as well.

The Courts are amenable to providing for lost future royalties if the termination had occurred due to the failure of payment of royalty fees by the franchisee. The franchisor should make it amply clear that the loss caused by lost future profits will be insufferable. The franchisors should first negotiate and understand franchisee’s situation. If franchisor is inconsistent and not improving in his payment of royalty, termination of the agreement is the best option for preventing further loss to the business.
Authored By: Adv. Anant Sharma & Shivangi Ghosh

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