The decision to purchase a franchise is a big one. It is usually the outcome of months of investigation into what franchise to purchase, the pros and cons, the available alternatives, review of the Franchise Disclosure Document (FDD), meetings and phone calls, and a significant financial investment. It is not a decision that is ever taken lightly.
When franchisors are in the process of selling a franchise to a franchisee, the franchisor might make promises, guarantees, or other statements about the nature of the franchise. It is often these types of specific assurances that tip the scales in favor of purchasing one franchise or another.
But, what happens if the promises turn out to be false? This can lead to, at a minimum, ill will toward the franchisor. At its most extreme, this can lead to a business relationship that fails to perform as initially agreed.
The franchisee might conclude that there was an agreement breached. The franchisor and its attorneys, however, are likely to refer the franchisee to what are called the Parol Evidence Rule and the Integration Clause in the franchise contract as prohibiting the enforcement of any terms other than what is in black and white.
What are these rules, and is there an exception to them that a franchisee can avail him or herself of?
The Parol Evidence Rule is a rule of evidence. It holds that extrinsic evidence cannot be introduced to contradict a written contract. Thus, evidence of conversations or emails cannot be provided to show that the agreement with a franchisor promised something than was actually in the franchise agreement.
This rule is further reinforced by the standard Integration Clause that is contained in virtually all franchise agreements. An Integration Clause says that the agreement is the full and complete agreement, and that there are no other agreements between the franchisor and franchisee.
As you can see, with the combination of the Parol Evidence Rule and an Integration Clause, an franchisor can easily argue that any other promises they made are unenforceable.
There are, however, a large and important exception to these rules that franchisors frequently forget about: fraud.
It is established law that a claim for fraud defeats the Parol Evidence Rule and an Integration Clause. In the context of franchises, a fraud claim usually involves promises, statements, or implications, or failure to disclose certain facts, which induced the franchisee to enter into the agreement. Fraud claims typically require that the franchisee rely to his or her detriment on the fraudulent statements of the franchisor. That is, the falseness of the statements must be material to the contract (minor or unimportant false statements probably do not sustain a claim for fraud).
One of the oldest and most cited decisions on this issue in North Carolina jurisprudence explains “It is a well-established general rule that if the parties reduce their entire contract or agreement to writing, whether under seal or not, the court will not hear parol evidence to vary or change it, unless for fraud, mistake or the like.” Cumming v. Barber, 99 N.C. 332 (1888).
The franchise agreement may be voided if the franchisee can prove to a judge or jury’s satisfaction that fraud occurred. This often requires filing a lawsuit and going through the litigation process. Nevertheless, if a franchisee is caught in a franchise that he or she feels was sold under false pretenses, this is a viable exit strategy.
Furthermore, North Carolina law holds that a franchisor’s unfair or deceptive business practices might be a violation of the anti-trust statute, G.S. § 75-1.1. Violation of that statute may entitle the franchisee to treble damages, costs, and attorney’s fees.
As you can see, if a franchisor makes false representations about the franchise it sells, just because the franchisee signed a contract does not necessarily mean there is no way out.
If you are a franchisee who has a dispute with your franchisor, contact us at 980-999-3557 to see how we can help. DYE CULIK PC is a Charlotte, North Carolina business and franchise law firm that represents entrepreneurs throughout the Old North State.
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