May 7, 2015 - Franchise Articles by |

UNCERTAIN FRANCHISOR PROMISES SPELL DOOM FOR FRANCHISEES

Unenforceable oral franchise applications lead to much frustration and disappointment in the franchise purchasing cycle. Potential franchisees wishing to purchase a franchise are required to complete an application approval process before a franchise agreement is executed.  In turn, franchisors initially will notify the potential franchisee that the application and “approval” papers will contain explicit language explaining that the franchisor’s “approval” of the franchisee, in itself, does not create a binding franchise agreement.  In addition, since a contract is not enforceable unless certain key provisions are spelled out in specific terms, the franchisor will sometimes express its approval in general, vague language so that it will not be obligated to the franchisee before a written agreement is signed.  Therefore, an “approved” franchisee who has not yet signed a written franchise agreement is probably not in a binding franchise relationship.  In Conner v. Hardee’s Food Systems, Inc., the applicants for a fast-food restaurant franchise learned this lesson the hard way.

In that case, Hardee’s Food Systems, Inc. (“Hardee’s”), the franchisor, had contacted the franchisees about a franchise opportunity with the company.  After the parties discussed the opportunity, Hardee’s presented the franchisees with an approval process “checklist” consisting of two components:  an application portion and a development portion.  During the application phase, the franchisees asked Hardee’s representatives several times whether Hardee’s intended to develop company-owned stores in Sevier County, Tennessee, the region in which the franchisees hoped to place their store.  The Hardee’s representatives repeatedly assured the franchisees that, to the best of their knowledge, Hardee’s had no such plans.

Confident that they would be permitted to proceed with their plans to develop a franchised store in Sevier County, the franchisees successfully completed all five steps of the application portion of the approval process.  Thereafter, Hardee’s notified the franchisees both orally and in writing that Hardee’s had “conditionally approved” their entry into the Hardee’s system, subject to their completion of a basic management training program.  Further, the franchisees still had to complete the development portion of the approval checklist, including the submission to Hardee’s of a “final site package” proposal and the execution of a written franchise agreement.

Based on the Hardee’s representatives’ previous statements that Hardee’s did not intend to develop company-owned restaurants in Sevier County, the franchisees proposed a site for their new franchise along the Parkway in Sevier County.  To the franchisees’ surprise, however, Hardee’s rejected the proposed site due its proximity to a nearby existing Hardee’s restaurant and because Hardee’s indeed intended to develop company-owned stores throughout Sevier County.  The franchisees subsequently submitted site plans for five additional alternative sites in and around Sevier County, all of which Hardee’s rejected due to its previously undisclosed plan to develop company-owned stores in the region.  Within the next several months, Hardee’s opened two company-owned stores in Sevier County.

The franchisees filed suit against Hardee’s and asserted, among other things, a claim for breach of contract.  Hardee’s responded by filing a motion for summary judgment in which it asked the court to “skip” the trial in the case and enter “summary judgment” in its favor on all of the franchisees’ claims, including the breach of contract claim.

Although the parties never signed a written franchise agreement, the franchisees argued that an “express” contract or franchise agreement had been created when Hardee’s gave them written and oral confirmation that it had approved the franchisees’ application.  In addition, the franchisees alleged that, in light of the parties’ conduct and the surrounding circumstances, an “implied,” unspoken contract had been formed between the parties.

The court, rejecting the franchisees’ contention that the parties had entered into a franchise agreement, granted summary judgment in favor of Hardee’s and dismissed the franchisees’ case.  In so ruling, however, the court noted that, in certain circumstances under Tennessee state law, a binding contract can be created even where the parties had planned to, but did not, sign a formal written document.  The court concluded that this principle was inapplicable to the franchisees’ claim, explaining that a contract is created only by mutual assent, and the franchisees in this case had reason to know that Hardee’s did not yet intend to enter into a franchise agreement.  In particular, the court found that the franchisees had not completed all of the required steps in the checklist and that the parties had never agreed to a specific franchise location.  According to the court, a contract, whether written or oral, must contain specific details regarding all essential terms.  The court, reasoning that “the location of a franchise is one of the most essential and material terms in a franchise agreement,” concluded that the parties’ inability to agree to a specific location for the proposed franchise in this case precluded a finding that a franchise agreement existed.

Undoubtedly, the franchisees in this case expended an enormous amount of time, money, and energy preparing to develop their Hardee’s franchise.  At the end of the day, however, a court upheld Hardee’s decision to deny the franchisees the opportunity that Hardee’s had promised them.  This case is another example of why every franchisee should consult with an experienced franchise attorney, even during the “application phase.”

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