Franchise and Business Opportunities

Why a Franchisee Should Care About Statutes of Limitations and Contractual Limitations in Franchise Contracts (And How an Attorney Can Help)

J. Michael Dady, Attorney
Dady & Garner, PA

Often the first time a franchisee is exposed to a statute of limitations may be the last, as it may be too late for an attorney to be of assistance. Talking to an attorney early on, rather than later, is vitally important for franchisees as it helps protect themselves from problems before they rear their ugly heads. Simply stated, a statute of limitation answers the question: “How long do I have to file my lawsuit?” Stated another way, statutes of limitations are legislative enactments whereby a particular statute forbids a franchisee from recovering on a lawsuit after a set number of years. In addition to statutory limitations, franchise contracts can also attempt to limit the time frame during which a franchisee may bring a suit against the franchisor. For both contractual and statutory limitations, the term of years varies depending upon the jurisdiction and nature of the action. That is to say the limitation’s period depends upon what state’s law applies, and also the type of suit actually filed by the franchisee, e.g. a negligence claim’s time period will often vary from that of a breach of contract claim, or a franchise act claim.

The regularly-cited purpose underlying a limitation period is that, after a number of years, the franchisor should be safe in its reasonable expectation that the slate has been wiped clean of old obligations. Thus, conceptually, a statute of limitation is predicated upon a fairness rationale. Many times, with the passage of time, vital evidence is lost, memories grow fainter, and possible witnesses disappear. As such, because of the existence of these evidentiary infirmities, a trial may not bring a just result.

In franchise cases, the statute of limitation’s clock can start ticking at one of five distinct points in time: (1) the date of the harm; (2) the date on which the franchisee actually discovered the harm; (3) the date the franchisee should reasonably have discovered the harm; (4) some arbitrary time, such as the signing of the franchise contract and; (5) the time when the parties to the franchise contract agree the clock will begin ticking.

For example, in a not-to-uncommon scenario, a franchisee should be concerned with limitation problems when a franchisor encroaches upon or otherwise disrespects the franchisee’s exclusive territory. The franchisee may be given assurances or other promises by the franchisor that may alleviate its angst, at least for a while. However, over time, their relationship may further deteriorate, and some years later, the franchisee may wish to file suit. Again, depending upon the jurisdiction and the franchise contract, recovery by the franchisee may be prevented by statute or even by the franchise contract itself. The franchisee needs to consult an attorney to determine what statute applies to the specific situation and whether any contractual limitation language, restricting the period of time a franchisee may recover, is valid. The longer a franchisee lets the clock tick, the more likely will encounter problems recovering on a claim.

Once an attorney determines what statute of limitation applies to a franchisee’s case, the next step is to establish when the clock starts ticking. As stated above, often a statute of limitation begins to run on the date that the franchisee experienced “harm.” However, this rule has exceptions. Some exceptions exist to shield a franchisee, where it may have been unaware for years that it had been harmed. For example, in the above scenario, where a franchisor allowed another franchisee to encroach into the original franchisee’s territory, it would be unlikely that the franchisee would be unaware that another moved into its trade area. However, if the original franchisee were in fact unaware, perhaps due to the nature of the franchise, such as a door-to-door sale, then it could possibly be shielded by an exception called the “discovery rule,” and thus be able to recover. This is more fully discussed below.

In our example, the limitation’s period could begin at any one of the five points in time mentioned in the second paragraph. To begin with, the applicable statute may start the clock ticking on the date of harm. The harm occurred when the franchisor contractually allowed another franchisee to enter the original franchisee’s exclusive territory. Also, the limitations period may start the clock ticking on the “date of discovery” of the harm, or on the date when the franchisee “should have discovered” the harm. So, under the former “date of discovery rule,” the clock would not begin running against the franchisee until it actually found out about the other encroaching franchisee. However, under the latter rule, a court would look at the facts of the case objectively and ask, “Whether a reasonable person under the same circumstances would have discovered the harm any earlier?” So, if our franchisee were derelict in discovering another franchisee selling into its territory it would not be shielded by this exception, and as such, would be barred from recovering. In other words, if almost every other franchisee, under the same or similar circumstances, would have discovered another franchisee encroaching upon its territory earlier, then our franchisee would be out of luck. The final two possibilities, which are covered in this article, would be that the statute’s clock begins ticking from the moment the parties agree upon the terms of the franchise contract or alternatively, it begins ticking when the parties to the contract agree that the clock will begin ticking. Under these last two scenarios, the franchisee may be completely unaware that the clock is running against it from the moment of entering the contract. It is for this reason, and many others, that we advise people to seek a knowledgeable franchise attorney early on, even before the negotiation phase, to ensure that they are not signing away rights that may prove to haunt them years later.

* Michael Dady gratefully acknowledges the assistance of Dady & Garner , PA associate C.J. Kuhn in preparing this article.

Michael Dady is the founding partner of Dady & Garner, P.A., a nine-member firm with offices in Minneapolis and New York, which limits its national practice to representing franchisees, dealers and distributors engaged in serious disputes with their franchisors or suppliers. Michael Dady is a former member of the Governing Committee of the ABA Forum on Franchising; he is listed in the Best Lawyers in America; and is a member of the Million Dollar Advocates Forum, having recovered several results in excess of one million dollars for clients who have been treated unfairly. To learn more about Dady & Garner, P.A. or to reach Michael, click here.

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