Franchisee's Fraud Claims Against Franchisor Dismissed By North Carolina Business Court

The written provisions of a franchise agreement -- and its merger clause -- resulted in summary judgment on a franchisee's fraud and other claims against a franchisor. The case, decided last Friday by the Business Court, is L'Heureux Enterprises, Inc. v. Port City Java, Inc.

Conflicting Representations

Plaintiffs claimed they had premised their purchase of a bakery on verbal representations from Port City Java, a franchisor of coffee shops, that it would only cost $50,000 to convert a small existing coffee kiosk in the bakery space into a full sit-down cafe.

Plaintiffs obtained an upfit estimate six days after closing in a range of $100,000 more than the $50,000 represented. Plaintiffs then sued the franchisor for fraud, negligent misrepresentation, unfair and deceptive practices, and breach of contract.

But before closing, the Plaintiffs had asked the franchisor's COO for a guarantee on the upfit costs. He wouldn't provide that, saying instead that he would not make any guarantee with regard to specific costs. He also provided a letter saying that the cost of renovations would be "entirely dependent on the extent and quality of same."

The Plaintiffs' claim was further weakened by the transaction documents. Those included a Uniform Franchise Offering Circular which provided an estimated range for typical costs associated with creating a cafe. And the Franchise Agreement signed by the Plaintiffs contained a merger clause which expressly excluded prior negotiations between the parties and stated that it represented the entire agreement of the parties.

Plaintiffs Could Not Establish Reasonable Reliance

Judge Jolly granted Port City's Motion for Summary Judgment, focusing on the issue of the reasonableness of Plaintiffs reliance on the alleged misrepresentations. He stated "[r]eliance is not reasonable where the plaintiff could have discovered the truth of the matter through reasonable diligence, but failed to investigate." Op. ¶37. He concluded that the Plaintiffs had not used reasonable diligence in relying on the claimed verbal statements "over clearly contrary language" in the written documents. Op. ¶39.

In dismissing the unfair and deceptive practices claim, Judge Jolly held:

While the disclosures and documents unfortunately appear not to have been adequately digested, investigated or understood by Plaintiffs, the forecast evidence does not establish any violation of duty on the part of Defendants to educate Plaintiffs on the plain meaning of the contractual documents involved in the Transaction.

Op. ¶47.

The clear written provisions of the UFOC and the Franchise Agreement also, according to the Court, warranted the grant of summary judgment on the breach of contract claim. 

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