When establishing a new franchise system, or updating a franchise agreement for an existing system, many franchisors consider what legal tools are available to them to encourage franchisees and their principals to comply with their contractual obligations.
One tool that many franchisors consider is the inclusion of “penalty clauses” in their franchise agreements. These are commonly understood as contractual provisions that permit franchisors to charge franchisees a prescribed monetary penalty in the event the franchisee breaches certain provisions of the franchise agreement. Such monetary penalties may be assessed daily, weekly, or monthly.
Although clauses specifying a monetary payment by the defaulting party may be attractive, franchisors should proceed with great caution when considering whether such provisions should be included in a franchise agreement.