The Franchise Memorandum

In the Spinks v. Krystal Co., 2007 WL 4568992 (D.S.C. Dec. 20, 2007), a federal court in South Carolina granted franchisor Krystal Company’s motion to compel arbitration. The case highlights the importance of carefully crafting guaranty agreements.

In the spring of 2004, Spinks Investment, Inc. and franchisor Krystal Company entered into franchise agreements for two shops located in South Carolina. Two years later, Spinks Investment closed and abandoned both franchises. Krystal notified Spinks Investment that it had terminated the franchises and that it would submit the matter to arbitration, pursuant to the franchise agreements’ arbitration provision, to recover amounts owed to the franchisor. The personal guarantors of Spinks filed a declaratory judgment action in state court, which Krystal removed to federal court, contending that the guaranty agreements did not include an arbitration clause. They also contended that, even if the guaranty agreements incorporate the franchise agreements’ arbitration clause, they did not sign the guaranty agreements in their personal capacity but as officers of Spinks.

The court disagreed. The court found that, under the guaranty agreements, plaintiffs agreed to be personally bound and personally liable for each and every provision in the franchise agreement, and that included the arbitration clause in the franchise agreements. Additionally, the court held that the language in the guaranty agreements indicated that the intention was to bind the plaintiffs personally. The court granted Krystal’s motion to compel arbitration and dismissed the case.

This case serves as a reminder of the importance of carefully drafting incorporation by reference clauses in ancillary documents to franchise agreements and making it abundantly clear whether a guarantor is signing a guaranty individually or in a representative capacity.