Imagine being asked to sign a contract to make a major purchase, like a franchise, asking questions of the franchise seller, getting your questions answered, and making your decision to purchase based on the answers to your questions.
Then you read the proposed contract, and it says that “what the seller told you doesn’t count … if it turns out the seller is lying there is nothing you can do.” Very few people would sign a contract saying this. The bad news is that large numbers of persons sign contracts saying this in not so many words. They are called “franchisees.”
A typical franchise agreement may include a clause like this:
[mk_blockquote style=”quote-style” font_family=”none” text_size=”12″ align=”left”]This Agreement, its exhibits and the Manual, as the Manual may be revised as permitted in this Agreement, comprise the entire agreement of the parties and supersede all prior representations and agreements with respect to its subject matter. No representations have been made to induce execution of this Agreement that are not included. The Agreement may not be amended or waived and no representations may be made by the Franchisor, except as stated in this Agreement or in writing signed by the Franchisor’s President.[/mk_blockquote]
The courts have split on the extent to which contract language like this will defeat a franchisee’s claim he or she relied on statements made in the sales process that were not true. Make no mistake. Disclaimer clauses like this one create licenses for the franchisor or its sales team to tell outright lies (less likely to occur) or half-truths (more likely to occur) misleading the buyer.
Let’s take an example: In the FDD, the franchisor accurately disclosed 10 units failed last year; some units earned far less than average; and 8 failed franchisees have sued for fraud. After reviewing these disclosures, the prospective franchisee asks why 10 units failed and why 8 franchisees are suing. In response, the franchisor tells tall tales: “The failed units did not follow our system … no one who actually follows our system has ever failed.” The franchisee accepts this explanation, buys the franchise, follows the system and fails anyway. The franchisee sues for fraud upon determining that the franchisor’s verbal explanation of the FDD was not true. The franchisor cites the disclaimer clause and asks the judge to dismiss the case, arguing that the parties’ contract confers immunity on the franchisor for telling lies.
Another example: The FDD discloses that the pizza sauce must come from the franchisor’s distribution arm. In sales conversations after the franchisee reviews the FDD, the franchisee asks to see the price list. That request is declined, but to soften the blow, the franchisor’s authorized sales representative adds “don’t worry, with the size of our system, we have tremendous buying power which gives our franchisees a huge advantage.” Believing this statement true, the franchisee buys the franchise only to learn that the verbal statement was false. Once again, the franchisor claims immunity based on the disclaimer clause, arguing that its lying must be ignored since the franchisee agreed in writing that s/he was not relying on anything outside the FDD.
Franchisees that sign disclaimers of reliance risk having no legal remedy if the franchisor were to exaggerate, deflect, overpromise, embellish, misdirect, or blatantly lie to make the sale. Before buying the franchise, make sure that all important statements made to you are written down and exempted from the disclaimer. Or it is too late for that precaution, be sure to hire a trial lawyer that knows his way around these licenses to lie.
Carmen D. Caruso is a trial lawyer in Chicago with his own firm. He represents franchisees and dealers across the country in serious cases. He will continue his discussion of good faith and fair dealing and related topics in subsequent posts.