7-Eleven, Inc.’s Duty To Act Reasonably In Remodeling The Store And Repairing And Replacing Equipment
The May/June issue of Avanti contained an interesting article by former General Counsel for NCASEF, Arnold J. (Arnie) Hauptman, Esq., regarding the maintenance provisions of the Franchise Agreement between franchisees and 7-Eleven, Inc. (SEI). Arnie’s article described the potential liability to SEI for injuries to 7-Eleven customers in franchised stores due to the excessive control exercised over the franchisees by SEI. If you have not read his article yet, I recommend it to you.
While reading Arnie’s article, I was reminded of the many, many franchisees who have complained to me they have had difficulty during inspections of their stores by Customer Experience Consultants (CECs) using the Cleanliness Evaluation Forms when the condition of their stores—including the flooring and the equipment—is so bad it is very difficult or impossible to clean properly. At the most recent NCASEF convention in Las Vegas, one franchisee reported her store floor tiles were so old and had been waxed so many times they were “fossilized.” Over the years, other franchisees have told me their drink dispensaries and other machines were so old they could not be cleaned even with hours of scrubbing with every kind of cleaner and lots of “elbow grease.”
When franchisees are marked down for problems with ongoing store conditions by the CECs, some rightfully believe they are being penalized for the failure of SEI to properly repair and/or replace the building structure, paint, flooring and/or equip- ment. When a customer sees badly deteriorated building surfaces, tiles, paint, and equipment, the customer’s experience naturally suffers. Should the franchisee suffer poor customer experience and low marks on their cleanliness evaluations for the failure and/or refusal of SEI to remodel the store and/or repair or replace equipment? Of course not.
Franchisees with older stores and equipment frequently request new equipment or a remodel of their store from SEI but are routinely put off by field consultants and market managers who say it is not in the budget, or to wait a year or two or five. If SEI has the funds to build a brand new 7-Eleven store a block away from an existing store, funds should be available to remodel older stores or replace decrepit and/or inoperable equipment.
SEI claims it can repair and replace badly deteriorated building structures, materials, and equipment at its whim. Paragraph 20(d) of the Franchise Agreement provides:
“20(d) Maintenance Performed By or Through Us. When we consider it necessary during the Term of this Agreement, we agree to: (1) repaint and repair the interior and exterior of the Store; (2) replace the 7-Eleven Equipment, including cash registers and point-of-sale computers; (3) replace plate glass windows and front doors; (4) replace the floor covering, exterior walls, roof, foundation, and parking lot; (5) maintain the structural soundness of the Store; and (6) maintain the HVAC Equipment. You hereby consent to the foregoing. We may charge you for any of the repairs or replacements contemplated by this Paragraph 20(d) if, in our reasonable opinion, your abuse or neglect makes them necessary.”
Other provisions of the Franchise Agreement demonstrate the obligations of SEI to repair and replace worn out flooring, paint, and equipment are not wholly discretionary. SEI has made it clear that the “uniform presentation of a high quality 7-Eleven Image is critical to the customer’s perception of the 7-Eleven System…” [see paragraph 1(a)(1) of the Franchise Agreement]. This sentence, written by SEI in its Franchise Agreement, clearly demonstrates SEI’s recognition of the importance of the 7-Eleven Image. The maintenance of the 7-Eleven Image obviously is not a one-way street. If it is important for the franchisee to present a high quality 7-Eleven Image, it is likewise just as important for SEI to perform its obligations of repair and replacement of the Stores’ improvements and equipment in order to impress customers. SEI admits as much in the Franchise Agreement in paragraph 1(a)(4) in the 2004 Franchise Agreement and paragraph 1(a) (5) in the 2012 Franchise Agreement which provides (in part) as follows: “We also agree to contribute to the value of the 7-Eleven Service Mark and brand by fulfilling those duties and tasks assigned to us in this Agreement as our responsibility within the 7-Eleven System.”
In paragraph 8, SEI agrees it may replace equipment at its option, as follows:
“We may, at our option, remove or replace any of the 7-Eleven Equipment or add new 7-Eleven Equipment, including cash registers and point of sale computers and 7-Eleven Equipment of a type or category other than currently exists. Any new or additional 7-Eleven Equipment will be added to the list of 7-Eleven Equipment on Exhibit B or we agree to otherwise provide you with electronic or written notice of such changes to the 7-Eleven Equipment. You agree to, at all times use, as required, all 7-Eleven Equipment currently in the Store or that we add to the Store. We may provide you with replacement Equipment if certain Equipment is damaged or becomes inoperable. If you fail to promptly return the damaged or inoperable equipment to us, we may charge you for the cost of the replacement Equipment by debiting your Open Account.
Note the use of the word “may” instead of “shall.” This reflects an attempt to couch responsibility to remodel the store or to install new equipment completely its own choice. However, under contract law, the fact the Franchise Agreement entitles SEI to use its discretion does not give it the right to unlimited and unfettered discretion. SEI must not act unreasonably in choosing whether or not to repair the store and/or replace equipment. SEI—the party who is given a discretionary power in the Franchise Agreement to do something to protect its own interests—may not use that power to unreasonably or unfairly harm the franchisee or to deprive the franchisee of the benefits of the Franchise Agreement. Stated another way, SEI must exercise its decisions whether to remodel the store and/or replace equipment in a reasonable manner.
When the language in paragraph 20(a) giving SEI the right to make the decision on these matters is considered in light of SEI’s responsibilities to help to maintain the 7-Eleven Image and to contribute to the branding of the 7-Eleven Mark, it cannot hide behind its preference when a franchisee’s store is badly in need of repairs, remodeling, or replacement of equipment. This is especially true when SEI’s CECs mark the franchisee down on the Cleanliness Evaluation for conditions caused by SEI’s failure to fulfill its duties to the franchisee.
No one can argue that when SEI allows “fossilized” flooring, inoperable equipment, or peeling paint to exist in a store that SEI is exercising its discretion under paragraph 20 in a reasonable manner.
When a franchisee receives a Letter of Notification (LON), or worse, a Notice of Material Breach (NMB) because of a low Cleanliness Evaluation score, and the problems stem from a failure or refusal of SEI to properly maintain the store or replace aging equipment pursuant to the high standards of the 7-Eleven Image, that franchisee should send a letter back to SEI stating the problems with the cleanliness of the store are a direct result of SEI’s failure to properly maintain the store and its equipment. It is good policy, for the health of your business, if ever you receive an LON, that you respond in writing to document your situation.