If a beverage shop franchisee cannot pay the franchise fee, can the franchisor demand full payment in one lump sum?
Many beverage shop franchisees are unable to afford the full franchise fee upfront when starting their business.
As a result, franchisors often allow franchisees to pay in installments.
However, if the franchisor suddenly changes their mind and demands full payment before the franchisee has completed the installment payments, how would the court view this situation?
Court Ruling on “Shu You Tou” Beverage Franchise Case
According to a court ruling involving the Shu You Tou beverage shop, the franchisor’s demand for the franchisee to pay the entire franchise fee in one lump sum was deemed illegal.
In this case, the total franchise startup fee was NT$2.7 million. The franchisor and franchisee had agreed that an initial payment of NT$650,000 would be made, with the remaining NT$2.05 million to be paid in installments. Additionally, the franchisor asked the franchisee to sign promissory notes for NT$500,000 as a punitive breach penalty and NT$400,000 for early termination.
Since the franchisee continued to bear an interest rate of 4.99%, they were unable to afford the remaining NT$2.05 million after paying the initial NT$650,000. The franchisor then unilaterally terminated the agreement, citing the franchisee’s inability to pay for goods.
Final Court Ruling
1. The franchisor illegally terminated the contract, causing damage to the franchisee. The franchisee is entitled to a partial refund of the startup fee.
2. The early termination of operations was due to the franchisor’s breach, so the franchisee is not liable for the early termination penalty.
How Should Franchisors Discuss Franchise Fee Payments?
Based on the Shu You Tou case, franchisors should keep the following in mind when negotiating startup fees with franchisees:
‧ The payment method for franchise fees must be reasonable; franchisors cannot demand full upfront payment.
‧ Franchisors must not demand excessive punitive damages or early termination fees from franchisees.
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