Franchise Lawyer Blog

Merger Clauses

Merger clauses are very common in franchise agreements. A merger clause is a section of a contract that states that the contract is the complete agreement between the parties. If any part of the understandings reached between the parties is not included within the “four corners” of the contract (the document itself), then neither party is bound by it.

Let’s think about what this really means. If a representation of a franchisor, for example, offers numerous assurances about the franchise during a discovery day, those “pledges” will mean little to nothing if they are not included in a contract with a merger clause.

Why do franchisors use merger clauses?

Merger clauses provide a level of certainty for both parties as to the terms of the agreement. Courts will view a contract as the statement of the final intent of the parties. A court can look beyond the agreement to determine intent if the agreement is ambiguous on its face. The merger clause simply puts aside the discussions and promises made prior to the contract and states that the contract reflects the final decision of the parties. This protects the parties to the contract from litigation involving discussions held outside of the four corners of the document. It becomes incumbent upon each party to make certain that the agreement reflects everything for which they have bargained.

What does this mean for a franchisee?

First, read the franchise agreement very carefully. Having an attorney experienced in franchise law review the agreement before it is signed is a very good idea. If any of the promises made by the franchisor are not included in the agreement, consider amending the agreement.

If, however, you have already signed your contract and you have discovered that part of the oral agreement was not included in the contract, you may be able to bring a lawsuit for fraud or fraudulent inducement. Courts can find fraud if the franchisee was induced to sign the contract upon promises not included in the agreement. The resolution of that claim can be influenced by a number of factors: where the franchise litigation occurs, the sophistication of the parties and the expressed intentions of the agreement itself.

Source: NUWire Investor, “Franchise buyers beware: The menace of merger clauses,” Mike Sheehan, Nov. 5, 2012

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