The Franchise Memorandum

In In re Bath Junkie Franchise, Inc., 2008 WL 324760 (Tex. Ct. App. Feb. 7, 2008), a Texas Court of Appeals held that a dispute arising from a franchisor and franchisee’s mutual termination agreement was subject to the arbitration provision contained within the parties’ franchise agreement. The franchisee filed the lawsuit seeking damages after the franchisor failed to make the required “buy out” payment pursuant to the mutual termination agreement executed by the parties. Approximately 14 months after the franchisee commenced its lawsuit, the franchisor moved to compel arbitration in accordance with the arbitration provision contained within the franchise agreement.

In response to the franchisor’s motion, the franchisee argued that the arbitration provision was no longer applicable because the legal obligations contained in the mutual termination agreement had replaced the parties’ obligations under the franchise agreement, thereby making the arbitration provision unenforceable. The franchisee also claimed that the franchisor waived its right to compel arbitration because it waited 14 months after commencement of the lawsuit to commence arbitration.

The appellate court held that because the mutual termination agreement was conditional and only required a release of the parties’ obligations to one another under the franchise agreement if the parties performed their obligations under the mutual termination agreement, the mutual termination agreement did not replace the franchise agreement and the arbitration provision was enforceable. The court of appeals also concluded that the franchisor did not waive its right to compel arbitration by waiting 14 months to make its motion, because the franchisee failed to establish or show that it had been prejudiced by the franchisor’s delay in making the request for arbitration.