Non-signatories to Franchise Documents can be Bound to the Terms therein.
Most franchisees likely recall the volumes of pre-signing paperwork, comprised of countless pages of information. Despite the size of the task, the documents are critically important and contain the terms of governance, including Disclosures, Statistical Data… Arbitration Clauses and Covenants Not to Compete.
Franchisees sign the documents, as a necessary requisite to acquiring a business. The signatories are therefore bound to the terms therein, understandably so.
Bound to an Agreement You Did Not Sign
As scary as it may seem, franchise agreements can reach non-parties. Such is the case in a scenario where one's spouse buys a franchise and signs her/his name to the franchise documents. The non-signing spouse can still be bound to the terms of the agreement. Thus, it is possible for the franchise agreement to bind those who did not even sign the document.
HOW?! Theories under which a Non-Signatory can be Bound
There are actually many different theories that a franchisor could advance in order to bind non-signatories. The most commonly seen issues arise under Agency and Promissory Estoppel.
•Promissory estoppel could bind a non-signatory the individual has received direct benefit from the contract. This is an attempt to promote fairness, as the rationale exists to bind those having benefitted from a contract.
•Agency exists when an individual acts on behalf of a principal. If the agent signs a contract, while in a representative capacity on behalf of the principal, the principal can be bound. So, the principal can be forced to adhere to the contract signed by the agent, despite not even signing.
Bound to WHAT?!
Commonly, non-signatory issues arise in the context of Arbitration Clauses and Covenants Not to Compete. Non-signatories have been forced to arbitrate in instances where a close pre-existing relationship exists (such as a spouse to a franchisee).
Covenants not to compete have been found to apply to non-signatories. This is alarming if the franchisee's spouse works in a related field. Caution must be exercised when reviewing this portion of the franchise agreement or else the spouse's livelihood could be jeopardized.
Craig M. Morgan, Esq., Managing Attorney at Providence Law
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