Franchisee Not Required to Give Franchisor Futile Opportunity to Cure

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

Even though a lingerie store franchise agreement required a franchisee to give the franchisor written notice and at least 60 days to cure any breaches before the franchisor could be held liable for breach, the franchisee was excused from that condition because the franchisor’s breaches were not curable, the California Supreme Court has decided. It would have been an idle act to provide notice and an opportunity to cure, according to the court.

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.

After the failure of the franchisee’s store, the parties had asserted breach of contract claims against each other. The arbitrator found in favor of the franchisee, ruling that the franchisor had failed to meet its obligations to provide operating manuals, training, assistance, and advertising. Accordingly, the franchisee was awarded more than $478,000 in consequential damages.

The parties’ agreement contained a mandatory arbitration agreement, which explicitly prohibited an arbitrator from modifying or changing any material provision. 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.

The contract’s no-modification provision would have barred an actual change. Had the arbitrator decided that the parties’ agreement should be reformed by changing the required 60 days’ notice to 30 days’ notice, he would have exceeded his powers, the court explained. However, excusing performance of a contract term in a specific factual setting is not modifying or changing the term.

California law provided for equitable excusal of contractual conditions causing forfeiture in certain circumstances, including those circumstances making performance futile, the court observed. The franchisor took issue with the arbitrator’s factual finding that providing notice of the asserted breaches would have been an idle act. However, it was for the arbitrator to find the facts, not for the trial court or the appellate courts.

The June 9 decision in Gueyffier v. Ann Summers, Ltd. appears at CCH Business Franchise Guide ¶13,912.