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Franchising is a business structure where a person licenses intellectual property to replicate a business in a different location. The initial business owner is known as the ‘franchisor’. The person who wholly owns their replicated business is known as the ‘franchisee’. Indeed, the popularity of franchising stems from the fact that this business model allows businesses to expand quickly and with little to no cost. However, like all business models, there are legal issues you must consider when negotiating the franchising contract. Sometimes, a franchisor will make promises to the franchisee before the franchising agreement is signed. This article will explain whether such promises are legally binding.

When is a Franchisor’s Promise Legally Binding?

Promises are legally binding as long as they meet all the elements of a binding contract.

The key requirements of a binding contract are as follows:

1. A Clear Offer

A clear offer means that one party has communicated to the other that they wish to contract on certain terms. The party making the offer must present these terms to the other party using clear and precise language to avoid confusion.

2. Unequivocal Acceptance 

The party receiving the contract must accept it in a clear manner. The party must make sure to accept the contract in the manner set out in the contract. If they do not, the contract may not be valid.

3. Sufficient Consideration

It is vital that both parties receive sufficient consideration when they are contracting on certain terms. Sufficient consideration means that both parties receive something of value because of the contract. Specifically, consideration must be sufficient compared to what the other party receives.

4. Intention to Be Binding

Additionally, for an enforceable contract, both parties must intend for the contract to be binding. If a person enters into a contract but they lack this intention then a court will likely find that the contract is invalid.

5. Certainty of Terms

Finally, the terms of a contract must be certain and cannot be ambiguous. If a court finds that the terms of the contract are not clear, they can rule that clause, or the contract as a whole, is unenforceable.

Can I Rely on Promises a Franchisor Made Before Signing Our Agreement in NZ?

If the franchisor’s promises meet all the elements of a binding contract, they are legally enforceable. However, it can be hard to prove whether the franchisor wanted those promises to be legally enforceable. This is especially true if the franchisor made those promises orally rather than through a written statement. Therefore, it is always best to rely on written agreements for greater certainty.

It is good practice to ask your franchisor to clarify their statements if you are unsure if something they said is enforceable.

Entire Agreement Clauses

One way that franchisors can get around making enforceable statements is by including an entire agreement clause in their franchise agreements. Entire agreement clauses state that the franchise agreement constitutes the whole agreement. Importantly, this means that no other statements made prior to signing the agreement will form part of the agreement. Furthermore, entire agreement clauses exclude all prior statements or representations. Therefore, if a franchisor includes an entire agreement clause in their franchise agreement, the franchisee cannot usually rely on promises made to them before they signed the franchise agreement.

It is up to the courts to determine the enforceability of entire agreement clauses. Specifically, a court will decide if an entire agreement clause is fair and reasonable. In doing so, a court will determine whether any statements made by the parties before signing the agreement were crucial to the signing of the agreement itself. 

So, entire agreement clauses are useful to clarify that parties can only enforce what is within their written contract. However, a franchisor might make important promises to you before entering your agreement. If this is the case, and they are not included in the agreement you signed, a court may decide that the entire agreement clause is unfair and invalid.

Key Takeaways

Franchising allows people to buy a business with an established brand. It also makes it easier for business owners to expand without having to spend a significant amount of money. The franchise agreement is the contract between the franchisor and the franchisee, usually signed before the franchisee commences operation.

As a franchisee, you may believe that promises made before you signed the franchise agreement are legally binding. However, they are only legally binding if they meet all the elements of a binding contract. 

Furthermore, an entire agreement clause can exclude these statements from being part of the franchise agreement. This will only be the case if a court deems the clause as fair and reasonable. For legal assistance with franchising, contact LegalVision’s franchise lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

Can all franchisors include an entire agreement clause in their franchise agreement?

Yes, anyone is able to include an entire agreement clause in their contract but the courts will only enforce them if they are fair and reasonable and are regarded as conclusive between the parties.

What happens if a court finds that a franchise agreement is not binding?

If a court finds that a franchise agreement is not binding, then both parties are not under any legal obligations to follow the terms in the contract.

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