A franchisee paid a franchise fee to operate a coffee shop branch in premises provided to him by the chain. The franchisee was forced to close the business after being convicted of operating a business without a license. It was discovered that obtaining a business license for the premises was impossible due to planning restrictions, as the property was located in a service area within the lobby of an office building.
The Court found that the agreement was duly rescinded by the frenchisee and that the chain must compensate it. A party that entered into a contract due to misrepresentation by the other party is entitled to rescind the agreement. A franchisor who knew, or should have known, about a planning restriction bears the responsibility for the frustration of the contract’s purpose – the legal operation of abusiness. Here, the chain made a representation that a business license could be obtained, despite knowing, or at the very least having reason to know, that this was not the case, particularly given that a previous franchisee had left for the same reason. Therefore, the contract was duly rescinded and the chain was ordered to refund the franchisee’s money for the remaining period.
