How strong are "non-reliance disclaimers" or "integration" or "merger" provisions in franchise agreements at protecting a franchisor when it really matters? Only so much, a New York court recently decided.

For protection, franchisors often include "non-reliance disclaimers" in franchise agreements. By signing, the franchisee states they did not rely on any promise or representation which, though not in the printed Franchise Disclosure Document (FDD), was communicated in some way by the franchisor's staff. "Rather," the franchisee says, "I understand that only what is actually printed in the FDD is true."

To cover the other side of the issue and try to prevent any possibility of being bound by such promises, franchisors include an "integration" or "merger" clause in the franchise agreement. By signing, the franchisee agrees that only the terms printed in the agreement and its attachments - and nothing communicated outside of those documents - will actually bind the parties.

Two franchisees claimed they were induced to join the Engel & Voelkers real estate brokerage franchise by fraudulent statements made orally by E & V's representatives. E & V tried to have the claims dismissed based on non-reliance, integration and merger clauses in the franchise agreements. But the court refused to dismiss the claims and held that the anti-fraud provision in the New York Franchise Sales Act (NYFSA) prevented dismissal of claims just because such clauses were in the agreements.

The franchisees also claimed damage by not receiving FDDs before their first meetings with E & V's representatives. E & V moved to dismiss these claims as well, arguing that the franchisees could not suffer damage from failure to receive the disclosure at that early point because, ultimately, they received FDDs and were fully informed before they signed franchise agreements. Again the court disagreed, reasoning that the very existence of the NYFSA requirement implies that some harm could come to a franchisee just by beginning to speak with company representatives before having an FDD in hand.

Franchisors cannot depend fully on non-reliance provisions, merger clauses, or a "better late than never" approach to disclosure. A preferable approach is to have salespeople and company representatives trained in the rules and apply disciplined sales procedures.

To read the full opinion, click: EV Scarsdale Corp. v. Engel & Voelkers North East LLC, N.Y. Sup. Ct., para. 15,561.