An area developer entered into three agreements with a pizza franchisor and developed 50 franchises in Texas. The franchisor, Pizza Inn, Inc., tried to terminate all three contracts, though each had a twenty-year initial term and allowed two five-year renewals. The area developer sued for wrongful termination. A federal court in Texas denied Pizza Inn’s motion to dismiss the breach of contract claim.
At issue was whether the agreements’ termination provisions required the franchisor to give notice of the developer’s breach and time to cure. The agreement said the franchisor “may” give thirty days’ notice. The area developer argued that “may” meant the franchisor had discretion to give thirty days or a longer cure period, not discretion to give less than thirty days’ notice or no cure period. The court agreed. The franchisor had no discretion to terminate immediately; notice and a chance to cure were required. Only the amount of time between notice and the termination date was discretionary. The court ruled this was the only reasonable interpretation of the agreements [see: Division One Foods Inc. v. Pizza Inn Inc., N.D. Tex. Dallas Div. (July 27, 2021)].
The franchisor also argued that the area developer did not adequately plead its damages. The complaint alleged “Pizza Inn abruptly terminated the three Area Development Agreements, without cause” and claimed the area developer was denied its right to fifty percent share of all royalty, franchise fees and transfer fees generated in its territories. The court ruled these allegations adequately showed that Pizza Inn’s termination without notice or opportunity to cure resulted in damages to the area developer for the lost share of fees from franchisees.
Before issuing a notice of default or terminating a franchisee, area developer, area representative or subfranchisor, franchisors should consult franchise counsel and confirm compliance with all contract terms and state relationship laws. The default notice and cure periods in the agreement need to be followed to avoid breaching the agreement and reduce the risk of a claim for damages. There may be laws governing termination of franchisees to be considered, depending on the state where the area developer or franchisee is located.