Small Businesses and Franchises
Carlos Del Rey decided to open a Mexican fast-food restaurant and signed a franchise contract with a national chain
called La Grande Enchilada. The contract required the franchisee to strictly follow the franchisor’s operating manual
and stated that failure to do so would be grounds for terminating the franchise contract. The manual set forth detailed
operating procedures and safety standards, and provided that a La Grande Enchilada representative would inspect the
restaurant monthly to ensure compliance.
Nine months after Del Rey began operating his restaurant, a spark from the grill ignited an oily towel in the kitchen.
No one was injured, but by the time firefighters were able to put out the fire, the kitchen had sustained extensive dam-
age. The cook told the fire department that the towel was “about two feet from the grill” when it caught fire. This was
in compliance with the franchisor’s manual that required towels be placed at least one foot from the grills. Nevertheless,
the next day La Grande Enchilada notified Del Rey that his franchise would terminate in thirty days for failure to fol-
low the prescribed safety procedures. Using the information presented in the chapter, answer the following questions.
1. What type of franchise was Del Rey’s La Grande Enchilada restaurant?
2. If Del Rey operates the restaurant as a sole proprietorship, who bears the loss for the damaged kitchen? Explain.
3. Assume that Del Rey files a lawsuit against La Grande Enchilada, claiming that his franchise was wrongfully terminated. What is the main factor that a court would consider in determining whether the franchise was wrongfully
terminated?
4. Would a court be likely to rule that La Grande Enchilada had good cause to terminate Del Rey’s franchise in this
situation? Why or why not?
Debate This . . . A partnershi
