FIU Feedback to the Franchise Discussion

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Chapter 30: Sole Proprietorships and Franchises Chapter Summary: Sole Proprietorships and Franchises
Book Title: Business Law Today, Comprehensive Edition Text & Cases
Printed By: Teresa Halley (thall047@fiu.edu)
© 2020 Cengage Learning, Cengage Learning
Chapter Review
Chapter Summary: Sole Proprietorships and Franchises
Sole Proprietorships
The simplest form of business organization, the sole proprietorship
is used by anyone who does business without creating a separate
organization. The owner is the business. The owner pays personal
income taxes on all profits and is personally liable for all business
debts.
Franchises
1. Types of franchises—
a. Distributorships (for example, automobile
dealerships).
b. Chain-style business operations (for example, fastfood chains).
c. Manufacturing or processing-plant arrangements (for
example, soft-drink bottling companies).
2. Laws governing franchising—Franchises are governed by
contract law. They are also governed by federal and state
statutory laws, as well as agency regulations.
The Franchise
The franchise relationship is defined by a contract between the
Contact
franchisor and the franchisee. The contract normally spells out the
following terms:
1. Payment for the franchise—Ordinarily, the contract requires
the franchisee (purchaser) to pay an initial fee or lump-sum
price for the franchise license.
2. Business premises—The contract may specify whether the
business premises will be leased or purchased by the
franchisee and which party will provide the equipment and
furnishings.
3. Location of the franchise—The franchisor typically specifies
the territory to be served by the franchisee.
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4. Quality control—The franchisor may require the franchisee
to abide by certain standards of quality relating to the
product or service offered.
5. Pricing arrangements—The franchisor may require the
franchisee to purchase certain supplies from the franchisor
at an established price but cannot set retail resale prices.
Franchise
Usually, the contract specifies the duration and conditions of
Termination
termination of the franchise arrangement. Both federal and state
statutes attempt to protect franchisees from franchisors who
unfairly or arbitrarily terminate franchises.
Chapter 30: Sole Proprietorships and Franchises Chapter Summary: Sole Proprietorships and Franchises
Book Title: Business Law Today, Comprehensive Edition Text & Cases
Printed By: Teresa Halley (thall047@fiu.edu)
© 2020 Cengage Learning, Cengage Learning
© 2022 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means graphic, electronic, or mechanical, or in any other manner – without the written permission of the copyright holder.
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Chapter 30: Sole Proprietorships and Franchises: 30-4c The Importance of Good Faith and Fair Dealing
Book Title: Business Law Today, Comprehensive Edition Text & Cases
Printed By: Teresa Halley (thall047@fiu.edu)
© 2020 Cengage Learning, Cengage Learning
30-4c The Importance of Good Faith and Fair Dealing
Generally, both statutory law and case
law emphasize the importance of good
faith and fair dealing in terminating a
franchise relationship. In determining
whether a franchisor has acted in good
faith when terminating a franchise
agreement, the courts generally try to
balance the rights of both parties.
Learning Objective 4
When will a court decide that a
franchisor has wrongfully
terminated a franchise?
If a court perceives that a franchisor has
arbitrarily or unfairly terminated a
franchise, the franchisee will be provided with a remedy for wrongful termination. When a
franchisor’s decision to terminate a franchise was made in the normal course of the
franchisor’s business operations, however, that weighs in favor of the franchisor. In that
situation, a court generally will not consider termination wrongful as long as reasonable
notice of termination was given to the franchisee.
The importance of good faith and fair dealing in a franchise relationship is underscored by
the consequences of the franchisor’s acts in the following case.
Spotlight on Holiday Inns: Case 30.3
Holiday Inn Franchising, Inc. v. Hotel Associates, Inc.
Court of Appeals of Arkansas, 2011 Ark.App. 147, 382 S.W.3d 6 (2011).
Background and Facts
Buddy House was in the construction business. For decades, he collaborated on projects
with Holiday Inn Franchising, Inc. Their relationship was characterized by good faith—many
projects were undertaken without written contracts. At Holiday Inn’s request, House
inspected a hotel in Wichita Falls, Texas, to estimate the cost of getting it into shape.
Holiday Inn wanted House to renovate the hotel and operate it as a Holiday Inn. House
estimated that recovering the cost of renovation would take him more than ten years, so he
asked for a franchise term longer than Holiday Inn’s usual ten years. Holiday Inn refused,
but said that if he ran the hotel “appropriately,” the term would be extended at the end of ten
years.
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What is one indication that Buddy House had ran the Holiday Inn hotel
franchise “appropriately”?
House bought the hotel, renovated it, and operated it as Hotel Associates, Inc. (HAI),
generating substantial profits. He refused offers to sell it for as much as $15 million.
What might have been one reason that Buddy House refused an offer for
$15 million?
Before the ten years had passed, Greg Aden, a Holiday Inn executive, developed a plan to
license a different local hotel as a Holiday Inn instead of renewing House’s franchise
license. Aden stood to earn a commission from licensing the other hotel. No one informed
House of Aden’s plan. When the time came, HAI applied for an extension of its franchise,
and Holiday Inn asked for major renovations. HAI spent $3 million to comply with this
request. Holiday Inn did not renew the term for HAI, however, and granted a franchise to the
other hotel instead. HAI sold its hotel for $5 million and filed a suit against Holiday Inn,
asserting fraud. The court awarded HAI compensatory and punitive damages. Holiday Inn
appealed.
In the Words of the Court
Raymond R. ABRAMSON, Judge.
****
Generally, a mere failure to volunteer information does not constitute fraud. But silence can
amount to actionable fraud in some circumstances where the parties have a relation of trust
or confidence, where there is inequality of condition and knowledge, or where there are
other attendant circumstances.
In this case, substantial evidence supports the existence of a duty on Holiday Inn’s part to
disclose the Aden [plan] to HAI. Buddy House had a long-term relationship with Holiday Inn
characterized by honesty, trust, and the free flow of pertinent information.
What is the issue in this franchise-termination dispute case?
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He testified that [Holiday Inn’s] assurances at the onset of licensure [the granting of the
license] led him to believe that he would be relicensed after ten years if the hotel was
operated appropriately. Yet, despite Holiday Inn’s having provided such an assurance to
House, it failed to apprise House of an internal business plan * * * that advocated licensure
of another facility instead of the renewal of his license. A duty of disclosure may exist where
information is peculiarly within the knowledge of one party and is of such a nature that the
other party is justified in assuming its nonexistence. Given House’s history with Holiday Inn
and the assurance he received, we are convinced he was justified in assuming that no
obstacles had arisen that jeopardized his relicensure. [Emphasis added.]
What is the rule of law in this franchise-termination dispute case?
Holiday Inn asserts that it would have provided Buddy House with the Aden [plan] if he had
asked for it. But, Holiday Inn cannot satisfactorily explain why House should have been
charged with the responsibility of inquiring about a plan that he did not know existed.
Moreover, several Holiday Inn personnel testified that Buddy House in fact should have
been provided with the Aden plan. Aden himself stated that * * * House should have been
given the plan. * * * In light of these circumstances, we see no ground for reversal on this
aspect of HAI’s cause of action for fraud.
Decision and Remedy
The state intermediate appellate court affirmed the lower court’s judgment and its award of
compensatory damages. The appellate court increased the amount of punitive damages,
however, citing Holiday Inn’s “degree of reprehensibility.”
Critical Thinking
Legal Environment Why should House and HAI have been advised of
Holiday Inn’s plan to grant a franchise to a different hotel in their territory?
Chapter 30: Sole Proprietorships and Franchises: 30-4c The Importance of Good Faith and Fair Dealing
Book Title: Business Law Today, Comprehensive Edition Text & Cases
Printed By: Teresa Halley (thall047@fiu.edu)
© 2020 Cengage Learning, Cengage Learning
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© 2022 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means graphic, electronic, or mechanical, or in any other manner – without the written permission of the copyright holder.
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