The Franchise Memorandum

In a case in which Gray Plant Mooty represented the defendant hotel management company, the federal court in North Dakota recently granted it summary judgment with respect to claims asserted by the owner of a franchised hotel. Ivesdal v. Three Rivers Hospitality, LLC, No. 1:12-cv-00073-DLH-CSM (D.N.D. Feb. 7, 2014). Hotel owner Ivesdal engaged Three Rivers to manage operations of his franchised AmericInn hotel in Dickinson, North Dakota. The parties entered into a Management Agreement governed by Minnesota law. After declining to renew the Management Agreement following several years of operations, Ivesdal sued, claiming that the hotel had been mismanaged during the term of the agreement causing him significant financial damage. He brought claims for breach of contract, breach of the implied covenant of good faith and fair dealing, negligence, gross negligence, and breach of fiduciary duty. Most of Ivesdal’s claims were dismissed previously upon Three Rivers’ motion, which was primarily based on the operation of an exculpatory clause in the Management Agreement requiring Ivesdal to indemnify and hold Three Rivers harmless for all damages arising from any cause other than fraud, gross negligence or intentional conduct. Until now, however, the court did allow the suit to proceed on Ivesdal’s theories of gross negligence and breach of fiduciary duty—as they were not barred by the exculpatory clause.

Following discovery, Three Rivers moved for summary judgment on these remaining claims. Although Minnesota law recognizes the existence of a fiduciary relationship between a principal and its agent, the court found that the language of the Management Agreement itself did not support Ivesdal’s contention that a separate and distinct fiduciary relationship existed between the parties. Since Three River’s representation of Ivesdal under the Management Agreement was explicitly limited to the scope of authority granted in the agreement itself—which specifically disclaimed the existence of a principal/agent relationship or the ability of the parties to bind one another—the court found that Three Rivers was not Ivesdal’s agent and thus owed no fiduciary duty. The court also found that Ivesdal’s gross negligence claim failed because under Minnesota law, a plaintiff cannot recover tort damages for breach of a contract unless an independent duty exists outside of the duties imposed by the contract itself. Finding no evidence that any independent duty existed, as all of Ivesdal’s gross negligence claims related to specific duties imposed by the Management Agreement, the claim was dismissed.