Franchisor 101: Waive Before Check Out

Lewitt Hackman

A Georgia district court declined to dismiss a breach of contract case by a hotel franchisor against a franchisee. The court rejected the franchisee’s argument that the franchisor waived its rights under the parties’ license agreement and found the liquidated damages clause could be enforceable.

Holiday Hospitality Franchising sued for breach after its franchisee failed to timely construct and open a Hotel Indigo. The license agreement had a liquidated damages provision, which the franchisor used to claim damages of more than five million dollars.

In a motion to dismiss the action, the franchisee argued the franchisor waived its rights by allowing multiple extensions of deadlines and waiting too long to demand the liquidated damages.

Noting that waiver is generally a question for a jury to decide, the court found the franchisee had not shown such a strong case that a jury trial could be avoided. While Georgia law lets parties waive contract provisions by conduct, the court noted “the law will not infer the waiver of an important contract right unless the waiver is clear and unmistakable.”

The franchisee also argued the liquidated damages were unenforceable because the time frame for damage calculation—from the time of execution of the license agreement to the date of the final construction deadline—was excessive. Additionally, using average daily revenue of all Hotel Indigo locations to calculate the liquidated damages was an unreasonable estimate of potential losses.

Again, the court noted that a decision was premature, “while the reasonableness of the liquidated damages provision represents a question of law for the court, that determination rests upon a factual inquiry.” The court found the franchisor’s complaint for liquidated damages met the required elements to be enforceable.

Franchisors sometimes give extensions to franchisees on deadlines for construction and opening. Franchisors should document any extension and possibly include a nonwaiver statement to help ward off franchisee claims of inaction or waiver. A franchisor that wants to include liquidated damages in its agreement, should work with franchise counsel to draft the clause so if challenged, there is a better chance of it being upheld.

Holiday Hosp. Franchising, LLC v. N. Riverfront Marina & Hotel, LLP, Case No. 21-CV-2584 (N.D. Ga. Aug. 26, 2021)

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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