Hotel Franchisee Allowed To Present Evidence To Jury Of Hotel Chain’s False Promises In Negotiations
By: Carl L. Engel
On January 19, 2023, the U.S. District Court for the District of New Jersey, in the case Travelodge Hotels, Inc. v. Durga, LLC, allowed a hotel franchisee to present evidence to a jury that the franchising chain had made fraudulent promises that the franchisee could change the hotel’s brand to another one owned by the chain, thereby invalidating the parties’ contract. The chain had argued that the emails sent in negotiations about the change in brands were barred by the “parol evidence rule,” because the parties ultimately created a contract that did not contain these promises. The court, however, ruled that these emails could be presented as evidence that the chain made them fraudulently, without any intent to keep them, to induce the franchisee into signing the contract. This case, therefore, provides an illustration of the importance of not straying far from “puffery” when negotiating a business contract, because unkept promises may come back to void it.
Travelodge Hotels, Inc., is a business that provides its customers access to a “guest lodging facility franchise network.” Franchisees contract with the company for the right to build and operate a “Travelodge”-brand hotel using the company’s trademarks and proprietary reservation system. Travelodge is a member brand of the Wyndham Hotel Group. It neither owns nor operates hotels itself.
On October 23, 2013, Durga LLC entered into a franchise agreement with Travelodge to operate a 129-room “Travelodge”-brand hotel at a facility in the suburbs of Cincinnati for fifteen years. The agreement allowed Travelodge to terminate the deal under two conditions: (i) Durga LLC discontinued operating the facility as a “Travelodge” hotel, or (ii) if Durga LLC lost possession or the right to possess the facility. If the agreement was terminated under either of these conditions, Durga LLC would be required to pay liquidated damages.
In November 4, 2014, Travelodge sent Durga LLC a letter informing it that Travelodge had become aware that Durga LLC had stopped operating a “Travelodge” hotel at the facility, and that Travelodge was terminating the deal as allowed under the franchise agreement. Travelodge then filed its lawsuit to recover $500,000 in liquidated damages and other fees owed under the agreement. After discovery, Travelodge asked the court to enter summary judgment in its favor, arguing that there was no question of fact that Durga LLC had stopped operating a Travelodge at the facility or that it was owed this amount under the agreement.
Durga LLC argued in response that the agreement was void, because Travelodge had fraudulently induced them into signing it by falsely stating in negotiations that they could change the name of the hotel to another brand within Wyndham Hotel Group, such as a Days Inn or Ramada. Durga LLC argued further that when it requested the change after signing the agreement, Travelodge refused, thereby demonstrating that it never intended to keep the promise when it was made. The court found that Durga LLC had shown enough evidence that a jury could find that Travelodge had fraudulently induced it into signing the franchise agreement by promising a change in branding. Therefore, the court declined to enter judgment for Travelodge and is allowing the case to proceed to trial.
In making its decision, the court reasoned that emails and other evidence of the promised branding change were not barred by the “parol evidence rule,” even if they were from before the agreement was signed. Under normal conditions, these communications would be precluded from evidence, because communications in negotiations leading up to a consummated agreement are generally barred under the rule. The court reasoned, however, that where fraudulent inducement is alleged, the parol evidence rule does not apply. Accordingly, businesses should be careful not to stray too far from “puffery” in their negotiation communications, or they may risk voiding the contract that they are working so hard to execute.