March 13 2012
Most franchisors enter into franchise agreements where the franchisee is a legal entity in which the owner cannot be personally liable for debts. In most cases, franchisors demand that the franchisee owner(s) sign a personal guarantee in which each owner personally guarantees that the franchisee shall meet all of its obligations under the franchise agreement. In 2011 an appellate court(1) had the opportunity to scrutinise such a personal guarantee.
After a franchisee had declared itself bankrupt, the franchisor sued the franchisee owner, claiming that he was obliged personally to pay all outstanding unpaid franchise and marketing fees under the franchise contract.
Additionally, the franchisor claimed payment for all unpaid invoices for products purchased by the franchisee from the franchisor. The franchisor based these claims on a personal guarantee signed by the owner stating that he guaranteed as his personal debt all obligations of the franchisee under the franchise agreement.
The owner admitted that the personal guarantee covered the unpaid franchise and marketing fees, but denied that it also covered the unpaid product invoices. The owner argued that each order constituted a separate purchase agreement; even though the franchise contract had obliged the franchisee to buy these products from the franchisor, the terms and conditions of these purchases were not stated in the franchise agreement or in the operational manuals – they were stated on each invoice. Consequently, the purchases were not part of the franchise agreement and therefore were not covered by the wording of the personal guarantee.
The court found that the wording of the personal guarantee was so unclear that it could not determine whether the guarantee covered the unpaid invoices. Leaning towards established legal practice, the court inferred that an unclear written contract will be interpreted against the party which drew up the contract. Therefore, the court ruled in favour of the owner, holding that the personal guarantee covered only the unpaid franchise and marketing fees.
This ruling highlights that a franchisor that composes a personal guarantee to be signed by a franchisee owner must ensure that the wording is sufficiently clear to leave no doubt that the guarantee covers all obligations arising from the franchise relationship.
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