Is aFranchise Agreement Binding Without A Signature?
A Georgia federal court recently ruled that a person who didn’t sign a franchise agreement would still be held to that contract.
Pursuant to the terms of the franchise agreement, Swati Enterprises wasn’t permitted to sell or transfer the franchise agreement without Global’s written knowledge and consent. Nevertheless, just two months after the franchise agreement was signed, Swati purportedly sold the franchised restaurant in Texas to the Defendant Rahman without Global’s knowledge or consent. However, Rahman never signed the franchise agreement and claimed that he never received a copy of the franchise agreement in connection with the sale and that he was unaware of its existence until recently.
That left the franchisor caught between two parties who said that they bore no responsibility for violating the franchise agreement by opening a competing business in the same spot.
Court Says Franchise Agreement’s Provisions Are Enforceable
Chief United States District Judge Thomas W. Thrash said in his opinion that the primary issue was whether Rahman—who never signed the agreement—was bound by the obligations in the agreement. Of particular concern were the non-compete, personal jurisdiction provision, and forum selection clauses.
The judge explained that the franchise was sold to Rahman, and he performed under the franchise agreement as if he were a franchisee, accepting the agreement’s benefits. Global wasn’t aware of Swati’s and Rahman’s agreement because they said the two represented that Rahman was the manager for Swati and that Swati was still the franchise owner.
However, when the franchise term ended, Rahman rebranded the franchised restaurant but continued to sell fried chicken. Global asked the court for injunctive relief against Swati and Rahman for violating the Lanham Act and the non-compete provision in the franchise agreement for operating a similar restaurant. Swati didn’t oppose the injunctive relief and said it couldn’t comply because it no longer owned the restaurant. Then Rahman said he wasn’t bound by the franchise agreement because he didn’t sign it. The court disagreed.
Judge Thrash explained that Rule 65 extends to “the parties to the action, their officers, agents, servants, employees and attorneys, and upon those persons in active concert or participation with them.” Thus, even though Rahman said he knew nothing about the franchise agreement, he fell within the sphere of Rule 65 as an owner, employee, and someone “in active concert and participation” with Swati.
The judge further held that given Rahman’s prolonged performance under the franchise agreement and his acceptance of the benefits of the agreement, it was appropriate to impose the agreement’s non-compete on him under an assumption and equitable estoppel theory.
So as was shown in this recent case, in some situations, a franchisor may be able to enforce a franchise agreement against an individual who doesn’t sign—contingent on state law and federal law.
The Global case is also a caution to franchisors to keep their records up-to-date concerning franchisee ownership changes and to require franchisee to comply with franchise agreement terms that the franchisor be notified of such changes.
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