An interesting decision has recently come down from the Court of Appeals of the State of Wisconsin. In C&M Hardware v. True Value Company (May 2013), the appeals court reversed the lower court’s decision and ruled that an exculpatory clause in the contract between True Value and its franchisee, C&M, was unenforceable as against public policy and was indeed void. An exculpatory clause can take various forms, but their purpose is usually to disclaim any representations or warranties made by the franchisor outside of the contract – thus giving the franchisor protection against claims by a franchisee that they were promised a certain level of success for their new business.

hammer and nailsThe Court of Appeals began with the general premise that “exculpatory contract provisions are not favored by the law, but they are not automatically void and unenforceable”. In examining the contract provisions in question, the court deemed them invalid for two principal reasons. The first is that the provision “failed to clearly, unambiguously, and unmistakably explain to C&M that they were accepting the risk of True Value’s negligence.“ The contract provision did specifically disclaim any representations and warranties as to the performance of C&M’s business but it did not specifically waive True Value’s liability for misrepresentation.

The second reason the court ruled the provision invalid was that “the form, looked at in its entirety, failed to alert the signer to the nature and significance of the document being signed.” In other words, the exculpatory provision should have been conspicuous. The court noted the exculpatory provisions were in the same type-face as the other provisions in the contract, were not placed in a “particularly conspicuous location” and did not have any heading or other notice that would grab the reader’s attention. Many franchise agreements go so far as to have the prospective franchisee initial the exculpatory provisions or have them in a separate questionnaire which the franchisee must initial and sign. This Wisconsin decision demonstrates, such practices are highly advisable if you want your exculpatory provisions to be enforceable!

So, for the franchisors out there, certainly under Wisconsin law but I would recommend in any state, exculpatory clauses must be specific as to what liability they are waiving and must be conspicuous in the franchise agreement. For franchisees, if the agreement contains exculpatory language, make very sure you are not relying on representations about your business which are not contained in your agreement or the Franchise Disclosure Document. If you are, speak to the franchisor about these and either become comfortable with the risk that you cannot rely on those representations or add them into your contract as an addendum before you sign it.