Clearly Stated – The Pitfalls Of Ambiguity

Franchisors typically enjoy an advantage in franchise relationships-they draft the franchise documents. Reward never comes without responsibility, though, and the franchisor, as drafter, must clearly state the terms of the agreement. Ambiguous language in franchise documents can be dangerous because courts will generally interpret the meaning of ambiguous provisions against the drafter.

In Husain v. McDonald’s Corporation, McDonald’s agreed to allow an existing franchisee (the “Assignor”) to assign its franchise agreements for 7 restaurants to another McDonald’s franchisee (the “Husains”). Three of the franchise agreements (the “Expiring Agreements”) had less than 5 years remaining on their terms, and McDonald’s usually agreed to renew similar, soon-to-expire franchise agreements for 20 years at expiration (a “Rewrite”).

McDonald’s Assignment and Consent Agreement read: “In consideration of McDonald’s consent to this Assignment and the issuance of a [R]ewrite to [the Husains], Assignor waives, releases, and disclaims any claim for a [R]ewrite of the Corte Madre . . . location.” Despite this language, McDonald’s denied the Husains a Rewrite because the Husains were delinquent in paying fees to McDonald’s and had failed to renovate the 3 locations. The Husains claimed McDonald’s agreed to Rewrite the 3 Expiring Agreements. McDonald’s claimed the quoted language only applied to Corte Madre, a fourth location not at issue in the case because it had already been rewritten.

The California Court of Appeal ruled that the Husains could operate the 3 restaurants through trial, even though the 3 franchise agreements had expired, and found the Assignment and Consent “ambiguous as to whether “a [R]ewrite” refers to . . . [the] Corte Madre franchise or [all three] soon-to-expire franchises.” The Court scolded McDonald’s, saying it “would have been easy [for McDonald’s] to make [its] intention clear” by defining the term Rewrite or inserting “of the Corte Madre location” after the word Rewrite.

As a franchisor, know what you want to say, and then, be sure to say it! Use clear language and defined terms. Don’t leave it up to the courts to decide what you meant. You may review the entire case here.