Oral Guarantees to Prospective Franchisees May Have Violated New York Franchise Law

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

A franchisor of package delivery drivers could have violated the antifraud provision of the New York Franchises Law by making oral misrepresentations to ten prospective franchisees regarding the terms of their franchise agreements, a federal district court in New York City has decided.

The franchisees alleged that representatives of the franchisor orally guaranteed them commission rates above those set out in the franchisor’s offering prospectus and other documents.

Parol Evidence Rule

The franchisor asserted that the franchisees’ claims regarding the oral guarantees were barred from consideration by the parol evidence rule and by the doctrine of waiver. Evidence of the parties’ oral negotiations—after which the parties had signed an unambiguous agreement filed with the state— would ordinarily be barred as proof of fraud on the part of the franchisor, the court observed.

However, the franchisees disputed that the agreement they signed was the franchisor’s registered offering prospectus. They further alleged that the franchisor had refused to allow them to read the agreement prior to signing and had failed to provide them with a copy of the agreement. The franchisor was able to produce signature pages of its offering prospectus for only six of the ten plaintiff franchisees.

The facts raised doubts about the completeness of the written contract terms, and the franchisor’s subsequent withdrawal of its New York franchise registration called into question whether the terms of the agreement continued to bind the franchisees, the court found.

Unequal Bargaining Power

The franchisor’s procedural failings were of particular concern, given the unequal bargaining power between the parties. The franchisees were not sophisticated business negotiators and many had severely limited knowledge of English at the time they entered the agreements. The franchise law’s goal of protecting potential franchisees from fraud or deceptive practices by made this a particularly relevant concern in evaluating the franchisor’s liability.

Questions surrounding the franchisor’s withdrawal of its registration and the franchisees’ clear disadvantage in the bargaining process were factors that compelled consideration of the franchisees’ evidence of oral agreements with respect to the franchisor’s allege fraud, the court held.

Waiver

The franchisor’s contention that the franchisees waived any rights under the alleged oral agreements by continuing to work for lower commission rates was rejected. The franchisees’ subsequent behavior had no bearing on the admissibility of their oral agreements, which were relevant solely as evidence of the franchisor’s alleged fraud in the offering and sales of the franchises.

The decision is Vysovsky v. Glassman, CCH Business Franchise Guide ¶13,799.