What is the purpose of the liquidated damages clause in the California addendum for the Chocolate Bash franchise?
Chocolate_Bash Franchise · 2024 FDDAnswer from 2024 FDD Document
- New Section 17.6 is inserted into the Franchise Agreement and states as follows:
If termination is the result of Franchisee's default, Franchisee will pay to Franchisor a lump sum payment (as liquidated damages for causing the premature termination of this Agreement and not as a penalty) equal to the total of all Royalty Fee payments for: (a) the twenty-four (24) calendar months of operation of Franchisee preceding Franchisee's default; (b) the period of time Franchisee has been in operation preceding the notice, if less than twenty-four (24) calendar months, projected on a twenty-four (24) calendar month basis; or (c) any shorter period as equals the unexpired term at the time of termination. The parties agree that a precise calculation of the full extent of the damages that Franchisor will incur on termination of this Agreement as a result of Franchisee's default is difficult and the parties desire certainty in this matter and agree that the lump sum payment provided under this Section is reasonable in light of the damages for premature termination that Franchisor will incur. This payment is not exclusive of any other remedies that Franchisor may have including attorneys' fees and costs.
Source: Item 22 — CONTRACTS (FDD pages 38–39)
What This Means (2024 FDD)
According to Chocolate Bash's 2024 Franchise Disclosure Document, the California addendum includes a liquidated damages clause that addresses the financial implications if a franchisee defaults and the franchise agreement is terminated prematurely. This clause is designed to compensate Chocolate Bash for the anticipated losses resulting from the early termination of the agreement, without acting as a penalty.
Specifically, if a Chocolate Bash franchisee in California defaults, they will be required to pay a lump sum to Chocolate Bash. This sum is calculated based on the royalty fees paid by the franchisee. The calculation considers either the previous 24 months of operation, a projection based on a shorter operational period, or the remaining term of the agreement, whichever is shorter. This payment is intended to cover the loss of future royalty fees that Chocolate Bash would have received had the agreement not been terminated.
The document states that calculating the exact damages Chocolate Bash would incur due to early termination is difficult, and the liquidated damages clause provides a degree of certainty for both parties. However, this payment does not exclude Chocolate Bash from pursuing other remedies, such as attorneys' fees and costs, or from seeking damages and injunctive relief related to other breaches of the agreement. It's also important to note that California law places restrictions on the enforceability of certain liquidated damages clauses, as mentioned in the general addendum, so the specific application of this clause may be subject to legal review.