Can a franchisor use a franchise agreement to prohibit franchisees from sourcing supplies on their own (“unauthorized sourcing”) and claim NT$3 million in punitive damages?
In one food & beverage case, the court ruled that the franchisee must compensate NT$480,000!
According to Article 5, Paragraph 1 of the Smiling Fish Waffle Shop franchise agreement:
“To maintain consistency across the ‘Smiling Fish’ franchise system, Party B shall not change the designated ingredient brands for products without prior consent from Party A. If Party A verifies a violation of this rule, Party B shall pay a punitive penalty of NT$3 million. If Party B continues to violate the rules after warnings and Party A deems the situation serious, Party A has the right to terminate the contract at any time.”
In This Case:
The franchisee privately purchased soup powder and used it to prepare products for sale, causing the franchisor to lose control over product quality.
The court reduced the punitive damages to NT$300,000.
The franchise agreement also stated:
‧ “All products sold by Party B must be supplied through Party A’s logistics system or designated suppliers. Without Party A’s consent, Party B may not purchase from other vendors — otherwise, it will be treated as a serious breach of contract.”
‧ “For each serious breach, Party B shall pay Party A NT$50,000.”
The franchisee committed 9 violations.
The court reduced the penalty to NT$20,000 per violation, totaling NT$180,000.
Thus, the court ordered the franchisee to pay a total of NT$480,000 in damages.
This case demonstrates the power of punitive breach clauses in franchise agreements.
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