Liquidated damages after termination

Some franchise agreements set a payment in advance if the franchise ends early. One New York court upheld a clause based on average royalties; other states differ.

A liquidated damages clause sets, in the contract, the amount a franchisee owes if the agreement ends early because of the franchisee's default. It replaces proving actual losses after the fact with a formula agreed in advance. Whether a court enforces the formula depends on the state's law and the facts, and the sources collected for this site give one detailed example.

One example: the Bareburger decision

In NGM Mgt. Group, LLC v Bareburger Group, LLC (N.Y. App. Div., 1st Dept, 2024), the franchise agreements had been terminated for cause. The clause awarded "liquidated damages equal to the average value of the Royalty Fees [plaintiffs] paid (per month)" in the twelve months before termination, multiplied by 24, the number of months in two full years, or by the number of months remaining in the term, whichever is higher.

The franchisees argued the clause was an unenforceable penalty. The court held they had "failed to meet their burden to prove that the provision is a penalty" and noted the clause relied on actual average royalties paid. This is one New York decision on its own facts. Other states, and other clauses, can come out differently, and this page does not say how a court in your state would rule.

Other clauses in the same case

The same decision shows how several contract terms can combine. The court awarded the franchisor summary judgment on liability for its attorneys' fees under the franchise agreements, so a fee-shifting clause can add the other side's legal costs to a loss. It also enforced a no-challenge clause on the trademarks, which said the franchisee "shall not contest the validity of or our interest in the Marks," against franchisees who had alleged the franchisor misrepresented its trademark ownership. Both turned on the contract wording and New York law.

Where to look in your own documents

  • The termination and default sections of the franchise agreement, for any early-termination payment, acceleration of fees, or a formula based on royalties.
  • A fee-shifting clause, which says whether the loser pays the other side's lawyers.
  • Item 10 of the disclosure document, which must disclose the franchisee's potential liabilities upon default, including any accelerated obligation to pay the entire amount due (16 CFR 436.5(j)).
  • The signed personal guaranty, if any; see [personal guaranty and franchise termination](/guides/personal-guaranty-and-franchise-termination/).

Limits of what is known here

The sources gathered for this page do not include a survey of how states treat lost future royalties, or of how courts generally decide whether a clause is a penalty. So no general rule is stated. Some state franchise statutes also bar waivers of rights under the statute; see state franchise relationship laws. The costs of litigating the question are covered in going to court: costs and timing. A lawyer licensed in the state whose law the agreement chooses can say whether a clause like yours has been tested, and your agreement and notice control the figures that apply to you.

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