Will is currently completing his Juris Doctor at the University of Melbourne and is interested in helping to provide equitable and efficient access to legal resources.
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Franchising can be a great way to grow a brand without having to personally run every site. But when a franchisee starts cutting corners, ignoring your systems, or damaging customer trust, it can quickly turn from “growth strategy” into a daily headache.
If you’re dealing with a ‘bad’ franchisee, you’re not alone - and you’re not powerless. The key is knowing what your franchise agreement says, what New Zealand law expects from both sides, and how to take firm (but fair) steps to protect your network.
This guide is updated for current expectations in New Zealand, including the practical reality that brand reputation, online reviews, data handling and workplace compliance are more visible than ever. Let’s walk through what you can do, step by step.
What Counts As A ‘Bad’ Franchisee (Legally Speaking)?
It’s normal for franchisees to have different personalities, strengths and operating styles. A “bad” franchisee isn’t just someone you find difficult - it’s usually someone who is breaching the franchise agreement or creating a genuine legal or commercial risk.
Common red flags include:
- Not following the system (e.g. different suppliers, unauthorised products, pricing outside approved parameters, or refusing required promotions)
- Brand damage (poor customer service, hygiene issues, misleading advertising, or behaviour that attracts complaints)
- Non-payment (late or missed royalty payments, marketing levies, or required contributions)
- Operational non-compliance (failing audits, refusing reporting requirements, or not meeting training obligations)
- Unauthorised use of IP (using your trade marks outside scope, changing logos, running unapproved social accounts)
- Employment and safety issues (underpaying staff, unsafe work practices, poor record-keeping)
From a legal perspective, the most important question is:
Is there a breach of contract, and is it serious enough to justify enforcement action?
That’s why you should always start with the agreement and the evidence - not emotion (even if the situation is understandably frustrating).
Start With The Franchise Agreement: What Rights Do You Actually Have?
When you’re deciding what you can “do” about a franchisee, your starting point is almost always the franchise agreement. This is the contract that sets the rules for the relationship and explains what happens when those rules aren’t followed.
In practice, your agreement should be doing a few big jobs for you:
- Defining what the franchisee must do (operational standards, reporting, training, insurance, approvals)
- Protecting the brand and IP (how trade marks, marketing assets, and confidential information can be used)
- Creating clear breach and remedy pathways (notice requirements, time to fix, consequences)
- Setting out termination rights (including what counts as a “serious breach”)
- Explaining what happens after termination (handback of assets, de-branding, restraint clauses, transition support)
Check These Clauses First
If you suspect a franchisee is heading into breach territory, look for clauses dealing with:
- Performance standards and quality controls
- Audit rights and access to records
- Payment defaults and interest/collection mechanisms
- Non-compliance notices and “cure” periods
- Termination (including immediate termination for serious breach)
- Restraint of trade (post-termination non-compete / non-solicit)
- Confidentiality and return of manuals, recipes, scripts, systems
If your franchise documentation is being refreshed or rolled out across your network, it’s worth ensuring your “core documents” are consistent - for example, where your franchise sits inside a wider brand group, your Company Constitution and internal governance should line up with how decisions are made about enforcement and brand protection.
Be Careful With “DIY Enforcement”
It’s tempting to fire off a blunt email and “put them on notice”. But if you don’t follow the contract’s notice requirements (for example, who the notice must be sent to, how it must be delivered, and what timeframe applies), you can accidentally undermine your own position.
In serious situations, moving too quickly can also trigger counter-claims like:
- allegations of unfair treatment or inconsistent enforcement across franchisees
- claims you didn’t provide the contractually required support or training
- arguments that you “waived” breaches by not acting earlier
Getting the process right matters just as much as being “right” on the facts.
Take A Practical, Step-By-Step Approach Before You Escalate
Most franchise disputes don’t start with termination - they start with drift. The franchisee gets busy, stops following the system, misses payments, and then becomes defensive when you raise it.
A structured approach helps you stay calm, consistent, and legally safer.
Step 1: Document The Issues (Evidence First)
Before you confront the franchisee, get clear on what’s actually happening and what you can prove. Useful evidence might include:
- audit reports and inspection checklists
- photos (e.g. store presentation, product display, signage)
- customer complaints and review screenshots
- emails and messages showing approvals were required and not obtained
- payment history and overdue invoices
- training attendance records
This isn’t about “building a case” out of spite - it’s about being able to act fairly and confidently, and showing you’ve followed a proper process.
Step 2: Talk Early (And Keep The Tone Commercial)
Often, a direct conversation can solve problems faster than formal letters. Aim to keep the conversation practical:
- What’s not meeting standard?
- Why is it happening?
- What support do they need?
- What is the deadline for fixing it?
After the call, confirm the key points in writing. This helps avoid “he said / she said” later.
Step 3: Issue A Formal Breach Notice (If Needed)
If informal steps don’t work, you usually move to a breach notice under the agreement. A good breach notice typically:
- identifies the specific clause(s) breached
- describes the breach clearly, with examples and dates
- sets out what “remedy” looks like (what must change)
- states the timeframe for remedy
- explains consequences if they don’t fix it (including termination, if applicable)
When this is handled correctly, breach notices aren’t just “threats” - they’re a structured opportunity to bring the franchisee back into alignment with the system.
When Can I Terminate A Franchise Agreement In New Zealand?
Termination is usually the most serious step, and it’s also the step most likely to trigger a dispute. Whether you can terminate depends on the contract terms and how you follow the process.
Many franchise agreements allow termination in scenarios like:
- Unremedied breach after notice and an opportunity to fix it
- Serious breach (for example, fraud, serious misconduct, or major brand damage)
- Repeated breaches (a pattern of non-compliance)
- Insolvency or inability to pay debts
- Abandonment (closing the site without approval)
Even where the contract allows termination, you still need to consider broader legal principles. In New Zealand, franchise arrangements are still contracts - and contracts are governed by general contract law expectations like acting consistently with the agreement and not misleading the other party.
Watch Out For Misrepresentation And “Sales Talk” Issues
Sometimes a franchisee dispute isn’t just about their performance - it’s about what they believe they were promised at the start. If the franchisee claims they were sold the franchise based on inflated earnings, misleading statements, or unclear disclosures, they may raise allegations that sound like misrepresentation.
This is one reason franchisors should be very careful with:
- earnings claims in marketing materials
- statements made in discovery days and sales calls
- business projections not properly caveated
- “we’ll definitely find you a site” type assurances
If you’re heading toward termination, it’s smart to pressure-test whether any of these issues could be raised as a defence or counterclaim.
Termination Needs A Clean Process (Not Just A Strong Feeling)
If you terminate without following the contractual notice process (or terminate when the breach doesn’t justify it), you risk an argument that you repudiated the contract. That can expose you to damages claims, reputational risk, and operational disruption across the network.
This is where tailored legal advice is essential - because the “right” move depends heavily on what the contract says, what the breach is, and what evidence you have.
Other Options Besides Termination (That Still Protect Your Brand)
Termination can feel like the obvious solution, but it’s not always the best first outcome - especially if the location is profitable, the franchisee is salvageable, or you want to avoid a public dispute.
Depending on your agreement and goals, you may have other workable options.
Put Them On A Performance Improvement Plan (PIP-Style)
While “performance improvement plans” are more common in employment contexts, the same concept works well in franchising: clear targets, clear deadlines, and a structured support plan.
This can include:
- mandatory retraining
- extra audits for a set period
- approval requirements tightened temporarily
- weekly reporting on key metrics
Done properly, this approach helps you show you acted reasonably and gave the franchisee a real chance to get back on track.
Restrict Certain Rights Temporarily
Some franchise agreements allow you to suspend certain privileges if a franchisee is in breach - for example, restricting access to marketing campaigns or new product rollouts until they remedy defaults. The details matter, so you’ll need to check your exact drafting.
Arrange A Transfer Or Exit (By Agreement)
If the relationship is deteriorating, a “managed exit” can be the least damaging option.
This might look like:
- the franchisee selling to an approved buyer
- you exercising a buy-back right (if the agreement includes it)
- a mutual termination with agreed handover steps
Where you’re documenting a clean exit and ongoing obligations (confidentiality, restraints, handover of customer data, brand removal), a settlement-style deed can help prevent the dispute from continuing after the doors close - similar in concept to a Deed Of Settlement approach, tailored to franchising.
Step In To Protect Critical Operations (Only If The Contract Allows)
Some franchise models include step-in rights where the franchisor can temporarily take over operations if there’s a serious risk to customers, health and safety, or the brand. These clauses need careful drafting and careful use.
If you overreach, you can create liability and practical complications (including employment issues if staff believe they now work for you).
Don’t Forget The “Hidden” Legal Risks: Staff, Customers, Data And Reputation
A ‘bad’ franchisee often creates risks beyond the franchise contract. And in many cases, those extra risks are what force a franchisor’s hand.
Employment Problems Can Become A Brand Problem
Even if franchisees are independent business owners, underpayment allegations, poor workplace conduct, or unsafe conditions can quickly reflect on the franchisor’s brand.
From a risk perspective, you should have strong franchise requirements around:
- compliance with the Employment Relations Act 2000 and Minimum Wage Act 1983
- record-keeping and wage/time records
- workplace policies (harassment, bullying, privacy, conduct)
- hiring practices and onboarding
If your network provides templates or minimum standards, make sure they’re current and consistent. Where you also directly employ head office staff, it’s worth keeping your own documents clean and up to date too, including your Employment Contract templates and internal policies.
Customer Law Still Applies (Even If It’s “Their” Store)
Franchisees dealing with consumers in New Zealand must comply with key consumer laws like the Fair Trading Act 1986 (misleading conduct and advertising) and the Consumer Guarantees Act 1993 (guarantees around acceptable quality and services).
If a franchisee is making dodgy claims, refusing valid remedies, or advertising prices inaccurately, that can create:
- regulatory complaints
- disputes and chargebacks
- reputational damage to the wider franchise network
Your franchise agreement should support you to enforce brand-consistent marketing and customer handling standards - and your manuals should spell out the practical “how”.
Privacy And Customer Data Are Now Front-And-Centre
If your franchise system collects customer data (loyalty programmes, booking systems, email marketing, CCTV, incident reports), the franchisee’s mishandling of data can become a serious risk.
Under the Privacy Act 2020, organisations have obligations around collecting, storing, using and disclosing personal information appropriately. If your franchisees use shared tools or platforms, you should be clear on:
- who “owns” the data
- who can access it
- what happens when a franchise ends
- what security standards apply
This is one reason many franchise systems implement a centralised Privacy Policy and require franchisees to follow it as part of the system.
Online Reviews And Local Marketing Can Create Legal Exposure
Bad franchisee behaviour often shows up first in Google reviews and social media - which can lead to reactive, messy communications.
If a franchisee responds aggressively to reviews or posts content that’s misleading, discriminatory, or breaches platform rules, you may need to step in quickly to protect the brand and ensure messaging stays consistent across the network.
This is where having strong “approval rights” and brand guidelines (contractually enforceable) makes a real difference.
Key Takeaways
- A ‘bad’ franchisee is usually a franchisee who is breaching the franchise agreement or creating real commercial and brand risk - not just someone you disagree with.
- Your franchise agreement is the first place to look, especially for breach notice requirements, cure periods, audit rights, payment defaults and termination rights.
- Handle issues in a structured way: gather evidence, have an early commercial conversation, then escalate to a formal breach notice if needed.
- Termination is sometimes available, but it must be justified under the contract and carried out using a clean, compliant process to reduce dispute risk.
- There are often practical alternatives to termination, like a performance plan, restricted rights, or a managed exit (including a documented mutual separation).
- Franchisee issues can create wider legal exposure around consumer law, employment compliance, privacy and reputation - so protecting the brand means looking beyond the contract.
- If you’re unsure whether you have grounds to terminate (or how to do it safely), getting tailored legal advice early can save major time, cost and network disruption later.
If you would like help dealing with a franchisee dispute or tightening your franchise documentation, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.
