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Arbitration Regarding Expiration/Termination

Press Release on Arbitration Victory Regarding Expiration/Termination (3/21/02)

In an important decision announced March 21, 2002, a AAA Arbitrator ruled that the concept of “expiration” of a Franchise Agreement is distinct from that of “termination” of the Agreement. The prevailing party, represented by Mario L. Herman, a Washington, D.C. Franchisee Attorney, stated that the decision is important for franchisees who wish to go independent after completing their franchise term. Mr. Herman stated that “the lack of proper disclosure on the part of the franchisor was a critical factor in the Arbitrator’s ruling.”

Text of complete ruling

In the Matter of the Arbitration between Postal Annex+, Inc. and Donald MacDonald.

American Arbitration Association, San Diego, California. Case No. 73-114-0024-201-RWH. Dated March 21, 2002.

Following is a summary of a decision that was issued by an arbitrator in San Diego, California on March 21, 2002.

Summary

A mailing services franchise agreement that required a franchisee to surrender its premises to the franchisor upon the “termination” of the agreement did not include the expiration of the agreement at the end of its term within the meaning of “termination,” according to an arbitrator in San Diego, California. The franchisor had brought the arbitration claim, arguing that it had the right to force the franchisee of the expired agreement to surrender its location as if the franchisor had “terminated” the relationship due to the franchisee’s material breach. It was uncontested that the franchisee had not breached the agreement prior to its expiration.

The agreement did not state that there was a “termination” at the end of the term. If the franchisor had intended to include non-renewal at the end of the term within the definition of “termination” it would have been a simple matter to do so. Any ambiguity as to whether “termination” included expiration of the term of the agreement had to be construed against the franchisor because it drafted the agreement and caused any uncertainty to exist.

The lack of any disclosure in the franchise offering circular that expiration of the term of the agreement would be treated as a “termination” was an important factor, according to the arbitrator. The offering circular, like the agreement itself, failed to notify a prospective franchisee that the franchisor would have the post-termination rights it claimed upon the expiration.

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