Beware the Seemingly Innocuous Details in Franchise Agreements
October 09, 2008
Two recent court decisions emphasize the importance of paying scrupulous attention to the details of franchise agreements.
The Hi Hotel v. Holiday Hospital, Albert. of Queen’s Bench.
Pinnacle Pizza Co., Inc. v. Little Caesar Enterprises, Inc.
Right To Rescind Granted For Franchisor’s Failure to Sign and Date Certificate
A recent decision illustrates the importance of strict compliance with all provisions of applicable franchise laws, even those that are seemingly innocuous. While some states, including Minnesota, have adopted a “no harm, no foul” approach to franchise violations, other jurisdictions grant remedies to franchisees when their franchisor does not strictly comply with a franchise law requirement.
Perhaps the most glaring example comes from our neighbors to the north in Alberta, where a court recently granted a Holiday Inn franchisee the right to rescind its franchise agreement with the franchisor in spite of the fact that the franchisee was given a disclosure document that contained all the disclosures required under the Alberta Franchises Act. The Act provides that each disclosure document include a dated Certificate of Franchisor, signed by two officers, and Holiday Inn failed to sign and date the certificate. An Alberta court held that the disclosure document therefore did not comply with the franchise regulations, and the franchisee was permitted to rescind its agreement – without any showing of any omissions or misstatements in a disclosure document, or any harm to the franchisee.
The Hi Hotel v. Holiday Hospital, Albert. of Queen’s Bench.
Review Side Agreements Now to Save Time in Court Later
Many franchisors, particularly start-up companies, will agree to amendments to their form franchise agreements to induce new franchisees to join the system. However, while the original agreement was prepared laboriously by counsel, the side agreements, or amendments, are frequently never even shown to counsel, which can lead to serious unintended consequences.
In its early days, Little Caesar’s signed a seemingly innocuous amendment with a franchisee in South Dakota. The amendment said that the franchisor would not use any of the franchisee’s “original advertising materials.” Otherwise, the franchise agreement contained a provision, similar to that which we include in all of our clients’ agreements, stating that all improvements or modifications to the system belong to the franchisor. The franchisee adopted an advertising slogan, “Hot n Ready,” which was so successful that the franchisor eventually began promoting it to its other franchisees. The South Dakota franchisee sued, claiming these were advertising materials that belonged to the franchisee. Nearly four years, and no doubt hundreds of thousands of dollars in legal fees later, the franchisor prevailed, with the court finding this June that the term “advertising materials,” only covered tangible materials, such as printed brochures and television commercials, and not advertising slogans. Thus, subject to appeal, the franchisor prevailed, but its execution of a seemingly innocuous amendment cost them hundreds of thousands of dollars, and could have been much worse if the court had construed the words differently and found the franchisor breached the agreement.
Pinnacle Pizza Co., Inc. v. Little Caesar Enterprises, Inc.
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