Franchisors commonly request franchisees to sign a release of claims. A release of claims is where one or both parties agree not to sue the other. When signing a franchise agreement, renewing a franchise, transferring a franchising, closing a franchise, or resolving franchise disputes, franchisees are commonly asked to sign a release of claims.
As discussed in our post about franchise renewals, some states will not enforce a release of claims that is signed in conjunction with the renewing or acquiring of a franchise. In the state of Michigan, the law says: “[a] requirement that a franchisee assent to a release, assignment, novation, waiver, or estoppel which deprives a franchisee of rights and protections provided in this act” is “void and unenforceable if contained in any documents relating to a franchise.”
As seen in a case out of Michigan, laws that prevent the enforcement of the release of claims may not apply to circumstances beyond the signing of the franchise agreement. An example case is NBT Associates, Inc. v. Allegiance Insurance Agency CCI, Inc. In this case NBT Associates (NBT), a franchisee of Allegiance Insurance Agency CCI (Allegiance) sued Allegiance claiming fraud and misrepresentation in the sale of the franchise. Allegiance said, ‘You cannot sue us. You signed a release.’ The court agreed. NBT entered into a settlement agreement with Allegiance to resolve the payment of delinquent royalty fees. In exchange for Allegiance forgiving the late payment of fees, NBT signed a release of claim in favor of Allegiance. The court held that since the release was signed pursuant to a settlement and not the acquiring of a franchise, the release of claims was enforceable. NBT was barred from waging claims against Allegiance.
Lesson from the court: There are federal and state laws that govern the sale of a franchise, state laws that govern the franchise relationship, but very few laws that govern settlement agreements between franchisors and franchisees.