What is the Minimum Performance Requirement?
A minimum performance requirement is typically a provision in a franchise agreement that creates a certain minimum standard of performance that is necessary for a Franchisee to maintain in order not to be in default on the franchise agreement. Every franchise agreement will impose different standards on their franchise locations – some covering more areas of the franchise’s operations and some covering less. The purpose behind implementing minimum performance requirements is to be able to ensure that all of the franchise’s locations are performing adequately and also to track their sales. Additionally, because the minimum performance standards are described in the franchise agreement, both the franchisor and the franchisee manifest their consent to abide by those standards, thereby minimizing the risk of litigation in the future.
The way that the minimum performance standards are set varies by each individual franchise. Some franchisors prefer to unilaterally set those standards, whilst others negotiate the standards with the potential franchisee.
What Are the Downsides of Setting Minimum Performance Requirements?
Some potential issues in setting minimum performance requirements for franchise locations include not being able to adequately compare franchise locations in different markets. For example, a franchise location in New York City would have to be judged by very different metrics than a franchise location in rural Oklahoma.
Moreover, there have been many public policy concerns voiced about the minimum performance standards not being enforced equally and fairly throughout the franchise, and some locations being terminated for failure to adhere to extremely strict minimum standards. Such terminations result from the courts’ deference often given to the principle of the freedom of contract. It is, therefore, crucial to thoroughly review a franchise agreement for the penalties that it provides for not satisfying the minimum performance standards and whether those penalties include termination.
What can a Franchisee do if it fails to meet Minimum Standards?
There is judicial precedent of courts not upholding franchise agreements in cases where the franchisee was not able to meet the minimum performance standards. For example, in Burger King Corp. v. Mason, the Eleventh Circuit stated that the materiality of a breach is relevant when a party wants to terminate a relationship.
Typically, a court will allow a franchise termination based on “good cause”. There is no single definition of what constitutes “good cause”, as the term varies by different jurisdictions. In a dispute over minimum performance standards not being met, a court will most likely examine whether those minimum requirements were reasonable in that specific case by performing a factual inquiry into the circumstances surrounding the franchise agreement.
