When you are a guarantor of a franchise agreement, you guarantee the franchisee’s compliance with that agreement. In most cases, you also agree to be liable for any harm or damage that is suffered by the franchisor if the franchisee does not comply with the franchise agreement. Given the serious consequences that can arise from guaranteeing a franchise agreement, it’s important prospective guarantors know the nature of what they are agreeing to, and review the guarantee clauses carefully. This article explores the obligations of guarantors, and examines typical inclusions in guarantee provisions.
What is a guarantee clause?
A guarantee clause is a straightforward promise made by one party to ensure that a certain event or condition will occur. It provides an assurance to another party involved in a contract or agreement. A guarantee serves as a form of security, assuring the fulfilment of obligations or the attainment of specified outcomes.
Who usually guarantees a franchise agreement?
Not all franchise agreements include a guarantee clause or require a guarantor. However, in networks where the franchisee is usually a company, it’s common for franchisors to ask for a personal guarantee.
Sometimes, franchisors specify that each director of a corporate franchisee must serve as a guarantor. In other instances, only one guarantor is required.
When multiple parties guarantee a franchise agreement, they typically do so on a ‘joint and several basis’.
In contracts, “joint and several” means that multiple parties are individually and collectively responsible for fulfilling the terms of the contract. Accordingly, when a guarantee is provided on a joint and several basis, the franchisor may pursue all or just one of the guarantors for the full sum of the relevant claim or to enforce compliance with the franchise agreement.
What are the terms of guarantee clauses in franchise agreements?
The terms of the guarantee vary among different franchise agreements. Two main types of guarantee provisions exist: an unlimited guarantee and a limited guarantee.
In an unlimited guarantee, the guarantor assumes liability for ‘any and all’ losses incurred by the franchisor connected with the franchise agreement. A limited guarantee may cap this liability at a specific monetary value or only be enforceable in limited circumstances. An example of a limited guarantee is a guarantee which becomes operative ‘where loss or damage arises due to the negligence of the franchisee’.
What red flags exist in franchise guarantee provisions?
Prospective guarantors should watch out for several red flags when assessing the terms of a guarantee clause. These include:
- Never-ending guarantees: A guarantee stated to continue indefinitely or in perpetuity means the guarantor is never relieved of potential liability. Ideally, guarantees should only be in effect during the term of the Franchise Agreement.
- Far-reaching guarantees: Some guarantee provisions have extensive implications. An example is a guarantee where the guarantor is liable for ‘any and all loss, including any legal costs incurred on an indemnity basis’. Ideally, guarantees should include a ‘reasonableness’ element.
- Guarantees requiring entry into additional contracts: Certain guarantee provisions mandate the guarantor to sign additional documents,. This includes a requirement to sign a security deed at the option of the franchisor and ‘in the form required by the franchisor’ . This is dangerous where the terms of that security deed are unknown, and may be unfair.
What happens to the guarantee if I leave the franchise business?
Crucially, guarantees are provided by the guarantor personally. This means that even if a corporate franchisee sells the business, the guarantee will not be automatically revoked. Further, if an individual leaves the corporate franchisee, for example by resigning as director, any guarantees given by that individual will survive the resignation. The guarantee provision should outline the steps required when the guarantor no longer participates in the franchise business. These steps typically involve obtaining a release from the franchisor, and can include providing a replacement guarantor.
Key Takeaways
- Naming someone as a guarantor to a franchise agreement carries significant risk for that person.
- Prospective guarantors should carefully scrutinize the terms of the guarantee provisions and be mindful of any red flags.
- If a guarantee is provided by more than one party on a joint and several basis, it means either or all of the guarantors can be 100% liable.
- If any individual guarantor leaves a corporate franchisee, they should seek a formal release from the guarantee.