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Franchisee Giving Franchisor Notice

Peter Reap, the editor of CCH Franchise Business Guide, writes at Trade Regulation about a very interesting franchise case.

"

The California high court reversed an appellate court decision, which held that an arbitrator exceeded his powers when he applied an equitable defense to excuse the franchisee's failure to provide notice and an opportunity to cure and found in favor of the franchisee."

The California Supreme Court wrote:

"Celine Gueyffier and Ann Summers, Ltd. (Ann Summers), a British retailer, had a franchise agreement under which Gueyffier was to open an Ann Summers store in Los Angeles.

The attempted store opening was a failure, leading to claims by each party that the other had breached their agreement.

As the contract required, the matter was arbitrated, and the arbitrator found for
Gueyffier, concluding Ann Summers had failed to provide Gueyffier with
promised training, guidance and assistance.

In his written award the arbitrator found that for Gueyffier to have given Ann Summers written notice and at least 60 days to cure these breaches, provided, would have been an idle act because the breaches were not curable.

"

Some of the facts, as reported by the Court, are interesting:

"Ann Summers is a retailer of lingerie and sex toys organized under the laws of, and headquartered in, the United Kingdom. Gueyffier is a French citizen who resides in California."

And, how did the Californians react to the French/English sex invasion?

Not well.

"In March 2001, Gueyffier opened her Ann Summers store in the Beverly Center shopping mall.

According to the arbitrator's award, the shop met a "harsh" reception, with "tomatoes being thrown at the store and insults being yelled at Gueyffier."

Gueyffier quickly closed the store, though she later reopened in the same location under the name, "What Lies Beneath."

The issue before the California Court was whether the arbitrator exceeded his jurisdiction by not requiring that the franchisee give the required 60 days of the franchisor's breach - in effect, the arbitrator excused the performance of a material clause.

The limitation on the arbitrator's powers in the franchise agreement included inability to modify a material clause.

In particular, as Peter writes:

"The contract provision requiring notice and an opportunity to cure stated that it was "a material term of the Agreement and may not be modified or changed by any arbitrator in an arbitration proceeding or otherwise."

While the agreement limited arbitral powers to change the agreement, it did not unambiguously prohibit the arbitrator from excusing performance of a contractual condition where the arbitrator concluded that performance would be an idle act, the court held. "

What is going to happen here - I mean to future franchise agreement?

Well, this franchisor is probably going modify their agreement so that the modification clause also excludes the arbitrator from "excusing non performance of a material term".

This is a relatively pointless change - because we don't know what the franchisor failed to perform, didn't deliver the advertising, training or support.

Now, whenever I see "excuse non performance of a material term", I am going to tell the client that the franchisor is intending not to deliver on its promises and will hold you to the notice provisions - which in the heat of the moment, a franchisee is likely to forget.

Is this point of franchise law - to insert artificial barriers to the execution of a business model?

Full post as published by Misleading Advertising Law on June 23, 2008 (boomark / email).