• Beware of the Boilerplate Introduction
  • April 27, 2004 | Author: Genevieve A. Beck
  • Law Firm: Larkin Hoffman Daly & Lindgren Ltd. - Minneapolis Office
  • Many franchise agreements begin with an introductory paragraph, a "witnesseth" statement or various recitals that tout the virtues of the franchisor's business or systems. These introductory statements might state that the franchisor has "developed a proven system," "developed and perfected a system," or "developed a uniform system" for operating a particular type of business. The introductory statements also might highlight the success, reputation, or positive image of the franchisor's business systems.

    But beware: Although these statements are not intended by the franchisor to have any binding legal consequences, a franchisee may seize upon this language if his or her business is less successful than he or she had hoped, or if a conflict develops between the parties. More than one franchisee has asked a court or an arbitrator to rule that, by including such statements in the prefatory paragraphs of its franchise agreement, the franchisor has created an enforceable legal obligation to ensure the overall success of the franchisee's business.

    In a recent arbitration between a large national franchisor and one of its former franchisees, the franchisee complained that, among other things, its business was not as successful as it had expected. The franchisee attempted to use the introductory statements in the parties' franchise agreements, that the franchisor had "perfected" its system, to heighten the franchisor's obligations under other sections of the franchise agreements. The franchisee even presented a witness during the arbitration who testified that, in his expert opinion, the franchisor's inclusion of such language in the introductory paragraphs of its franchise agreements created an affirmative and enforceable obligation on the part of the franchisor to ensure that any of the discretionary services and assistance it rendered to the franchisee under other sections of the franchise agreements were effective and ultimately successful.

    The franchisee's arguments in the above arbitration were unsuccessful. Moreover, courts that have addressed this issue generally have held that such introductory statements do not create any affirmative duties on the part of a franchisor. In Coca-Cola Bottling Co. of Minnesota v. Coca-Cola Co., 164 F.Supp 293 (D.Minn. 1957), the plaintiff sought to rely on the "Whereas" clauses in a contract to support its contention that it received broad bottling rights under its bottling franchise. In addressing this argument, the court stated:

    There is no need to resort to the language of whereas clauses when the body of the contract is plain and unambiguous as to the rights which plaintiff received. It is well established that recitals do not govern the operative provisions of a contract unless the operative provisions are ambiguous. ... The contention that Western granted to plaintiff certain rights which are broader than those to be found in the operative provisions of plaintiff's contract cannot be sustained. It seems clear that there is no need to resort to the whereas clauses, [where] the operative clauses are free from ambiguity. Id. at 301-302.

    In a more recent case, Hoffman v. Midas International Corp., Bus. Franchise Guide (CCH) 11,554 (Ill. Cir. Ct. 1997), the franchisees sought to support their breach of contract and good faith and fair dealing claims by relying on a recital in their franchise agreements that stated that Midas offered certain services to assist its franchisees to "achieve maximum results." The franchisees apparently conceded that a contract recital generally does not have the same binding force as terms in the operative portion of an agreement, but they argued that the recital in their agreements set the "overall tone of the parties' franchise relationship" and that, in light of the recital, they reasonably anticipated "that Midas would help them achieve maximum results by not opening new shops in such a way as to cause them substantial harm." Like the court in Coca-Cola Bottling, the court in Midas held that the recital did not constitute a legally binding provision. The court noted that this was particularly true where the franchisees sought to use the recital to overcome an express provision in the body of their agreement that allowed Midas to build shops anywhere it chose. The court declined to adopt the franchisees' position that the recital obligated Midas to exercise its discretion to open new shops only in a manner consistent with the franchisees' reasonable expectations.

    In another case, Carlock v. Pillsbury Co., 719 F.Supp. 791 (D.Minn. 1989), the franchisees argued that recitals in their franchise agreements stating that the franchisor, Haagen-Dazs, "has created unique products of the highest quality, sold in the finest establishments," created a legal duty on Haagen-Dazs' part to distribute its products only through "upscale" retailers. In dismissing the franchisees' claims, the court recognized that the recitals were "only precatory language" that served to recognize Haagen-Dazs' past efforts to create goodwill and did not purport to impose any future obligation on Haagen-Dazs. The Carlock court recognized that if the recitals were interpreted as suggested by the franchisees, it would conflict with a provision in the body of the franchise agreements that expressly reserved to Haagen-Dazs the right to use any distribution method it might establish, and that such a result could not be sustained. See also Burger King Corporation v. Hinton, Inc., 203 F.Supp.2d 1357, 1363 (S.D. Fla. 2002), in which the court rejected the franchisees' argument that introductory paragraphs to various exhibits to their franchise agreement were evidence of Burger King's obligation to provide franchisees with general support.

    In Brenco Enterprises, Inc. v. Takeout Taxi Franchising Systems, Inc., Bus. Franchise Guide (CCH) 12,596 (Va. Cir. Ct. 2003), the court took this concept one step further. In rejecting the franchisees' argument that the "Whereas" clauses of the franchise agreements created legal obligations on the part of the franchisor, the court first noted the rule that "recital or prefatory provisions not set forth in the main text of a contract are superseded by the provisions set forth in the main body of the contract in the event of a conflict." It then found that the obligations purportedly set forth in the "Whereas" clauses were in direct conflict with later provisions in the franchise agreement because of the very fact that these later provisions were contained in a section that expressly stated that "[t]he obligations of the Franchisor ... are as follows." In other words, the court did not find it necessary to examine the franchisor's express obligations under the franchise agreement, because those express obligations were contained in a section that by its very nature was self-limiting.

    As these and other cases demonstrate, courts generally are not inclined to find that the prefatory language in franchise agreements can be construed as creating legally enforceable obligations on a franchisor. Nonetheless, in many of these same cases, the courts recognize that, under certain circumstances, such language may be used:

    • If the "operative provisions are ambiguous," Coca-Cola Bottling of Minnesota, 164 F.Supp. at 301;

    • To "ascertain the parties' intent when construing the contract," John Keenan Company, Inc. v. Norrell Corp., Bus. Franchise Guide (CCH) 12,148 (E.D.La. 2001), see also CMS Enterprise Group v. Ben & Jerry's Homemade, Inc., Bus. Franchise Guide (CCH) 10,748 (Pa. Ct. of C.P. 1995); or

    • As "an explanation of the circumstances surrounding the execution of the contract," Hoffman v. Midas, Bus. Franchise Guide (CCH) 11,554.

    Whether or not franchisees are winning their arguments concerning these prefatory statements, it can be very costly for a franchisor to defend against them. Consequently, franchisors should evaluate the introductory paragraphs and recitals in their franchise agreements and consider revising or eliminating any boilerplate language that refers to the success of the system or otherwise could be seen as creating an expectation on the part of franchisees that ultimately may not be attained.