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The “absolute discretion” trap

Posted on Date: Apr 14, 2014

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Sometimes one or two words in a franchise agreement can be the difference between financial life and financial death for a franchisee.

As an attorney who routinely represents franchisees, I sometimes see franchise agreements that say that the franchisor’s consent "will not be unreasonably withheld" or that the franchisor will exercise its discretion "reasonably." When I see this sort of language, it makes me very happy. Unfortunately, I see this reasonableness language less and less often.

On the other hand, franchise agreements that say that the franchisor may take action in its “discretion,” "sole discretion," or “absolute discretion” scare me to death. Courts and arbitrators will typically enforce this language as written. Courts in some states have even said that such "sole discretion" language overrides the “covenant of good faith and fair dealing” – a very bad result!

Bottom line – any reference in the franchise agreement to the franchisor’s “discretion,” “sole discretion,” or “absolute discretion” should be considered a hot-button issue and given careful thought. These will be areas of potential abuse, and it is entirely possible that a court or arbitrator will say you are out of luck and have no remedy at all for an abuse of discretion.

On the flip side, statements in the franchise agreement that say that the franchisor’s consent will “not be unreasonably withheld,” that the franchisor will only act in its “reasonable discretion,” or other references to reasonableness should be viewed as very positive.

While franchisors will frequently say that their franchise agreement is nonnegotiable, it never hurts to try to include a provision that discretion will be exercised “reasonably.” Also, franchisee associations and AAFD chapters may have greater leverage to negotiate such provisions. Sometimes, especially for smaller franchise systems or startup systems, you can negotiate a “rider” to the franchise agreement that could include a provision that discretion has to be exercised in good faith or that certain consents will not be unreasonably withheld.

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