Is the liquidated damages payment for Chocolate Fish Coffee considered a penalty?
Chocolate_Fish_Coffee Franchise · 2024 FDDAnswer from 2024 FDD Document
- 14.5 Liquidated Damages. If Chocolate Fish Franchising terminates this Agreement based upon Franchisee's default (or if Franchisee purports to terminate this Agreement except as permitted under Section 14.1), then within 10 days thereafter Franchisee shall pay to Chocolate Fish Franchising a lump sum (as liquidated damages and not as a penalty) calculated as follows: (x) the average Royalty Fees and Brand Fund Contributions that Franchisee owed to Chocolate Fish Franchising under this Agreement for the 52-week period preceding the date on which Franchisee ceased operating the Business; multiplied by (y) the lesser of (1) 104 or (2) the number of weeks remaining in the then-current term of this Agreement.
If Franchisee had not operated the Business for at least 52 weeks, then (x) will equal the average Royalty Fees and Brand Fund Contributions that Franchisee owed to Chocolate Fish Franchising during the period that Franchisee operated the Business.
The "average Royalty Fees and Brand Fund Contributions that Franchisee owed to Chocolate Fish Franchising" shall not be discounted or adjusted due to any deferred or reduced Royalty Fees and Brand Fund Contributions set forth in an addendum to this Agreement, unless this Section 14.5 is specifically amended in such addendum.
Franchisee acknowledges that a precise calculation of the full extent of Chocolate Fish Franchising's damages under these circumstances is difficult to determine and the method of calculation of such damages as set forth in this Section is reasonable.
Franchisee's payment to Chocolate Fish Franchising under this Section will be in lieu of any direct monetary damages that Chocolate Fish Franchising may incur as a result of Chocolate Fish Franchising's loss of Royalty Fees and Brand Fund Contributions that would have been owed to Chocolate Fish Franchising after the date of termination; however, such payment shall be in addition to all damages and other amounts arising under Section 14.3 and Section 14.4, Chocolate Fish Franchising's right to injunctive relief for enforcement of Article 13, and any attorneys' fees and other costs and expenses to which Chocolate Fish Franchising is entitled under this Agreement.
Source: Item 23 — RECEIPTS (FDD pages 41–119)
What This Means (2024 FDD)
According to Chocolate Fish Coffee's 2024 Franchise Disclosure Document, the liquidated damages payment is not considered a penalty. The FDD specifies that if the Franchise Agreement is terminated due to the franchisee's default, or if the franchisee attempts to terminate the agreement without proper cause, the franchisee must pay Chocolate Fish Coffee a lump sum. This sum is explicitly defined as liquidated damages and not a penalty.
The liquidated damages are calculated based on a formula that considers the average Royalty Fees and Brand Fund Contributions owed by the franchisee to Chocolate Fish Coffee over a specific period. This average is then multiplied by the lesser of 104 or the number of weeks remaining in the franchise agreement's term. If the franchisee operated the business for less than 52 weeks, the calculation uses the average Royalty Fees and Brand Fund Contributions owed during the actual period of operation.
The Chocolate Fish Coffee Franchise Disclosure Document states that this method of calculation is deemed reasonable because precisely determining the full extent of Chocolate Fish Coffee's damages is difficult. The payment covers the loss of future Royalty Fees and Brand Fund Contributions but is in addition to other damages and amounts arising under specific sections, Chocolate Fish Coffee's right to injunctive relief, and any attorney's fees and other costs Chocolate Fish Coffee is entitled to under the agreement.