Franchises

Franchises

What type of franchise was Del Rey’s La Grande Enchilada restaurant?

The Franchise between Del Rey and La Grande Enchilada could best be described as a chain-style operation franchise. It is a chain-style operation franchise because the two parties are both restaurants, and the franchisor is a national chain of restaurants known all over. Hence, franchising Del Rey was one way to expand its chain and trade market. The chain-style operation franchise is a type of franchise where the franchisee operates under a franchisor’s trade name and is recognized as a member of a particular group that works in the franchisor’s business.[1] Like other franchises, in chain-style operations, franchises the parties sign the contract that guides them on how to operate. If one party breaches the contract’s provisions, the other party is allowed to terminate the contract.

If Del Rey operates the restaurant as a sole proprietorship, who bears the loss for the damaged kitchen? Explain.

If Del Rey was operating the restaurant as a sole proprietorship, then the owner bears all the losses of the damaged kitchen. One of the major characteristics of sole proprietorships is that the owners have unlimited liability. This means that when the business makes losses and has to pay some debts, the owner-proprietor would be the one that would be used to pay the debts. The liability to the sole proprietors is unlimited.[2] In this kind of business arrangement, the owners of the businesses are not immune to the losses and debts the business makes.

Assume that Del Rey files a lawsuit against La Grande Enchilada, claiming that his franchise was wrongfully terminated. What is the main factor a court would consider in determining whether the franchise was wrongfully terminated?

If Del Rey decides to sue La Grand in court for wrongful termination of the franchise, the court would determine the case by checking on the fairness and good faith metric in the act of termination. Both the case and statutory laws assert the significance of good faith and fair dealings when it comes to the act of terminating a franchise. The laws require that franchise contracts be terminated on fairgrounds with sufficient reasons for termination. In most cases, Franchisors take advantage of their financial muscles, their wide network, and a large workforce to wrongfully terminate the franchise contracts with their franchises. When a franchise is wrongfully terminated, the franchisees suffer the most.[3] For instance, the case between Del Rey and La Grande squarely shows that the franchise contract was terminated unfairly. If the court finds that La Grande terminated Del Rey’s contract franchise by acting without good faith, it will order La Grande to compensate Del Rey for breaching the contract. However, if the court finds that the contract was terminated on fairgrounds, it leaves the matter the way it is.

Would a court be likely to rule that La Grande Enchilada had good cause to terminate Del Rey’s franchise in this situation? Why or why not?

The court would not likely rule that La Grande has valid reasons for terminating its franchise contract with Del Rey. The court would rule against La Grande because they have been told that in the contract, La Grande instructed Del Rey to be keeping the tower at least one feet away from the grill as a safety measure. It was found that the towel that caused the fire was two feet away from the grill.[4] Managing that Del Rey did not breach the terms of the contract; hence, La Grande had no valid reasons why it had to terminate the franchise contract with Del Rey.

Debate This Topic: All franchisors should be required by law to provide a comprehensive estimate of the profitability of a prospective franchise based on the experiences of their existing franchisees.

It would be right for all franchisors to provide an estimate of the profitability of a prospective franchisee. This is because some franchisors take advantage of ignorant prospective franchisees to offer unfair contractual terms. However, when it is stipulated in law that Franchisors should provide their accurate estimation of profitability to the prospective franchisee, the contract will be fair enough since the prospective franchisee will opt out if it is unfair.

Bibliography

Miller, R. 2017. Business law today. 11^th Ed. Engage Learning

[1] Miller, R. 2017. Business law today. 11th Ed. Engage Learning

[2] Miller, R. 2017.

[3] Miller, R. 2017.

[4] Miller, R. 2017.

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Franchises

Answer the 4 questions passed on the information given. Then discuss your position on the debate this topic.

Debate This: Franchises

Franchises

From Business Law II

Chapter 30, p.739

Carlos Del Rey decided to open a fast-food Mexican restaurant and signed a franchise contract with a national chain called La Grande Enchilada. Under the franchise agreement, Del Rey purchased the building, and La Grande Enchilada supplied the equipment. The contract required the franchisee to strictly follow the franchisor’s operating manual and stated that failure to do so would be grounds for terminating the franchise contract. The manual set forth detailed operating procedures and safety standards, and provided that a La Grande Enchilada representative would inspect the restaurant monthly to ensure compliance.

Nine months after Del Rey began operating his restaurant, a spark from the grill ignited an oily towel in the kitchen. No one was injured, but by the time firefighters put out the fire, the kitchen had sustained extensive damage. The cook told the fire department that the towel was “about two feet from the grill” when it caught fire, which was in compliance with the franchisor’s manual that required towels to be at least one foot from the grills. Nevertheless, the next day La Grande Enchilada notified Del Rey that his franchise would terminate in thirty days for failure to follow the prescribed safety procedures. Using the information presented in the chapter, answer the following questions.

1. What type of franchise was Del Rey’s La Grande Enchilada restaurant?
2. If Del Rey operates the restaurant as a sole proprietorship, who bears the loss for the damaged kitchen? Explain.
3. Assume that Del Rey files a lawsuit against La Grande Enchilada, claiming that his franchise was wrongfully terminated. What is the main factor a court would consider in determining whether the franchise was wrongfully terminated?
4. Would a court be likely to rule that La Grande Enchilada had good cause to terminate Del Rey’s franchise in this situation? Why or why not?

Debate This:

• All franchisors should be required by law to provide a comprehensive estimate of the profitability of a prospective franchise based on the experiences of their existing franchisees.