Deductible Termination in New Jersey: Avoiding Liability

Terminating a franchise can pose several potential pitfalls and expose a franchisor to significant liability. A franchisor cannot simply cancel, terminate or refuse to renew a franchisee for any reason. In most situations, there must be “just cause”, timely notice and proper documentation to support the decision. Failure to understand and follow these rules may violate the New Jersey Franchise Practices Act, NJSA § 56:10-1 and following. (“Deed”) and exposes a franchisor to liability for monetary relief and the awarding of attorney’s fees and costs to the franchisee.

Good cause

What constitutes good cause to terminate a franchise in New Jersey is generally a question of fact for a judge or arbitrator. Just cause is defined as “the failure of the franchisee to substantially comply with the requirements imposed on it by the franchise”. NJSA § 56:10-5. Therefore, a franchisor cannot terminate a franchise even if acting in good faith for a legitimate business reason if the franchisee does not materially breach its obligations under the franchise agreement.

An alleged breach of the Franchise Agreement must be material to constitute cause. For example, if a franchisee repeatedly breaches an express or implied requirement of the franchise agreement, the franchisor will likely have good reason to terminate the franchise agreement. On the contrary, minor offences, especially those that do not recur, are unlikely to be sufficient to establish just cause.

To determine if there is just cause, a franchisor must determine if the breach is central to the franchise agreement or relationship, if it has a significant impact on the operation of the franchise, or if it jeopardizes the reputation of the franchise.

The following are examples of what has been considered a violation that warrants termination for cause:

  • When a car manufacturer has granted a franchise to operate a dealership and the franchisee has attempted to transfer its obligations to a third party without the franchisor’s consent.

  • When a franchisee has not completed the construction of their business as contractually agreed with the franchisor.

  • When a franchisee violated the obligations of the payroll tax law, the court found that he had materially violated the terms of the franchise agreement.

Appropriate Notice

The franchisor must also provide timely written notice of its intention to terminate, cancel or refuse to renew the franchise. The notice must specifically state the alleged violations under the franchise agreement and provide 60 days notice[1] before cancellation, termination or non-renewal is permitted. NJSA § 56:10-5. A franchisor cannot contract around the terms of the law. For example, a 30 day notice requirement in the franchise agreement will not be enforceable.

Documentation

Detailed documentation is essential to support the decision to terminate and to provide a record if the franchisee later challenges the franchisor’s decision to terminate the franchise agreement. The franchisor must be specific, naming each alleged violation in support of its decision to terminate, cancel or refuse to renew the franchise. Franchisors should ensure that they have protocols in place to meticulously detail any breaches of their franchise agreement so that if a franchisee challenges their decision to terminate, the franchisor is well prepared with the necessary information to support their decision.

Risks

Terminating, canceling, or refusing to renew a franchise without cause is a violation of New Jersey Franchise Practices Law and may result in litigation. If the court convicts the franchisor, it can impose monetary damages to compensate the franchisee for the economic loss. The court may also award attorney fees and court costs to the franchisee.

If you are a franchisor considering terminating a New Jersey-based franchisee who is violating your franchise agreement, Stark & ​​Stark franchise attorneys can help.


FOOTNOTES

[1] There are two exceptions to this notice requirement. If the grounds alleged are:

  1. voluntary abandonment of the franchise by the franchisee, only 15 days’ notice is required, and

  2. the conviction by the court of the franchisee of a criminal act directly related to the activity carried on under the franchise, the termination, cancellation or failure to renew may take effect immediately upon delivery and receipt of a written notice following conviction.