Editorial

Legal Rights Of Franchisees Go Beyond The Documents

Franchisees all too often believe that the written agreement is the definitive embodiment of their rights and obligations with the franchisor. Franchisees may look at their written agreements, find the language they feel applies to their situation, and throw their hands up in the air in disgust, believing that all is lost because the language seemingly leaves them with no rights or remedies. This is a mistake.

Franchisees who find themselves looking at their Franchise documents should take note – franchisees have rights that go beyond the sometimes troublesome language commonly found in the franchise documents. Franchisees, who are in fear of being terminated, or who feel a need to get out of a bad relationship with a franchisor, should retain the services of a franchise attorney to evaluate their legal rights, obligations, and remedies.

Even where the signed franchise agreement contains written claims that the writing constitutes the entire agreement between the parties, franchisees should be aware that courts have been increasingly willing to go beyond the terms of the written franchise agreement to define the nature and extent of the enforceable rights and remedies of the parties.

The enforceable agreement between franchisor and franchisee may be different than, or even contrary to, the written provisions in the franchise agreement. Often there are oral communications between the franchisor and the franchisee at the time the decision to purchase the franchise is made. Also, oral commitments are sometimes made between franchisor representatives and the franchisee during the course of the franchise relationship. These communications, if enforced, may give the franchisee legal rights beyond those set forth in the written agreement.

How this works in practice is that most courts are willing to allow testimony as to communications to explain or clarify ambiguous writings. Additionally, evidence of the custom and practice in a particular industry, and the course of conduct between the particular franchisor and franchisee, is generally admissible to assist the jury in determining what the agreement was. So, if a franchisor has acted inconsistently in regard to its obligations under the written agreement, this conduct is likely admissible, even though the written agreement states it is not.

Furthermore, additional terms to the enforceable contract between the franchisor and franchisee may be implied by operation of law. Many courts have implied an obligation on franchisors to act honestly and in good faith, and some courts have gone so far as to hold that franchisors have a fiduciary duty to look out for the interest of their franchisees during the course of their business dealings. Thus, if a franchisee is told that it is being terminated for reason X, but later it discovers that it was actually terminated for reason Y, the franchisee, in many states, will likely be able to bolster its claims against the franchisor with this evidence even though the written agreement said nothing about the franchisor being under an obligation to act honestly.

It is a good idea, therefore, for prospective and current franchisees to attempt to get representations by franchisors as to precisely what their obligations and rights will be, and, where possible, to get these representations in writing.

Prospective franchisees should make contemporaneous and detailed notes of all meetings and conversations with both franchise salesman, and the franchisor’s representatives throughout the relationship. By doing so, the franchisee will have notes of events, which will aid otherwise failing memories. Finally, it should be noted that approximately 18 states have relationship statutes that protect franchisees against termination or non-renewal without good cause. It is also the case that, typically, these statutes may not be disclaimed by a contrary written agreement (for example, one which provides that the law of a different state applies).

If you are faced with a termination or a business need to get out of a franchise relationship, the time to obtain legal advice is, respectively, either immediately or before you inform the franchisor of your decision to terminate the relationship. A lawyer experienced in dealing with franchise relationships can provide you with guidance as to how and when to “cut the cord.” By taking this approach, you will be able to defend your rights if you are unfairly terminated, or minimize the likelihood of additional claims that may be brought by the franchisor, if you decide to end the relationship.

As you can see, in the case of a dispute between a franchisee and franchisor, there are many rights and obligations that go beyond the franchise documents. In order to insure that all these avenues are fully explored in the case of a disagreement, the franchisee should secure the services of a qualified franchise attorney.