Franchisee 101: No Legal Cure for Serial Defaults

Lewitt Hackman

A federal court in Michigan granted 7-Eleven’s motion for summary judgment, enforcing the franchisor’s right to terminate a franchisee with repeated defaults, even though each default had been cured.

7-Eleven’s franchise agreements allow the franchisor to immediately terminate a franchisee after issuance of four notices of default in a two-year period, regardless of whether default(s) were cured. The franchisee had ten defaults in two years. All of them were cured. The defaults included failure to submit timely cash reports and the store’s video recording system being offline for several months, which denied 7-Eleven reasonable access to observe the premises during business hours.

The franchisee argued that 7-Eleven lacked good cause to terminate under Michigan’s Franchise Law (the “MFIL”) because the franchisee cured its defaults. The MFIL prohibits a franchisor from terminating a franchise agreement, prior to expiration, except for “good cause,” which includes a franchisee’s failure to comply with any lawful provision of the franchise agreement and to cure such a breach after being given a reasonable opportunity to do so.

The franchisee argued that since it cured the defaults, the agreement could not be terminated. The court disagreed, holding that 7-Eleven’s provision allowing termination after four defaults met the MFIL’s good-cause requirement because the termination provision is intended to address the problem of serial breaches.

Franchise counsel can advise franchisors and franchisees on the interplay of the franchise agreement with state laws that may support or override contractual grounds to terminate. State laws vary regarding defaults and terminations. Relationship laws, enacted largely to protect franchisees, may still allow termination despite curing defaults, as happened in this 7-Eleven case. Knowledge of these laws, and advice from franchise counsel, is valuable for franchisors, and for franchisees, to understand terms of their franchise agreements and consequences and remedies if violated.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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