A U.S. district judge in Virginia has ruled that a restaurant chain operator is liable for breach of contract and is obligated to pay a franchise consulting company for sales and marketing services that the consultant performed for the chain under the contract between the two companies. Rejecting the contract defenses of lack of standing, fraudulent inducement, lack of specificity, lack of mutuality, and unconscionability, U.S. District Judge T.S. Ellis, III, of the Eastern District of Virginia, granted summary judgment in favor of the consultant.
The case arose from a 2008 contract between Freshii Development, LLC, which owns a chain of healthy fast-food restaurants, and Fransmart, LLC, an Alexandria, Va.-based company that agreed, in exchange for a percentage of franchise fees and revenues, to help Freshii expand by finding appropriate franchisees for its restaurants. In early 2010, Fransmart restructured its business and set up a new company to which it assigned its contracts and transferred its assets and liabilities. Freshii then stopped paying Fransmart under the contract, and Fransmart sued for breach. Freshii asserted five defenses to the lawsuit, all of which Judge Ellis rejected.
Freshii first argued that Fransmart lacked standing because the 2008 agreement was a personal services contract and therefore not assignable to a separate entity (such as the “new Fransmart”) without Freshii’s consent. Judge Ellis rejected this defense, noting that many aspects of the agreement led to the conclusion that it was not a personal services contract. For example, the agreement was between two corporate entities, it was for a duration of ten years, and it did not identify any individual as being material to performance. In any event, the judge wrote, it was not necessary to reach that issue because the contract contained a “successors and assigns” clause, stating that “the provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and to their successors and assigns.” This language, the court found, demonstrated that the parties intended the agreement to be assignable to a successor entity like the new Fransmart.
Next, Freshii argued that Fransmart fraudulently induced it to enter into the contract by misrepresenting its business model for marketing franchises and its financial strength. The judge found, however, that under Virginia law, promises regarding future actions such as promised marketing activities don’t constitute fraud. In addition, there was insufficient evidence that Freshii relied on these statements. The claims regarding Fransmart’s financial condition also didn’t constitute fraud because there wasn’t clear and convincing evidence that Fransmart was actually in financial trouble and because its opinions about its future viability can’t be the basis of fraud claims in Virginia.
Freshii also asserted that the contract was unenforceable for lack of specificity regarding Fransmart’s obligations. Judge Ellis ruled that the marketing and sales contract contained “all the essential terms required for a services contract under Virginia law,” and that contractual terms requiring “marketing” and “selling” were specific enough to be enforceable.
Freshii asserted that the contract was invalid for lack of mutuality because its only recourse in the event of breach was termination of the contract. Judge Ellis found, however, that nothing in the contract prohibited Freshii from suing for breach of contract and damages.
Finally, Freshii argued that the agreement was unenforceable because it contained unconscionable terms. Judge Ellis replied that these were sophisticated businessmen entering into an arms-length deal and that there was insufficient evidence of unconscionability. Freshii may have been unhappy with the deal, but that didn’t constitute grounds to void it.