For Carls franchisees in California, what is the potential impact of the liquidated damages clause in the franchise agreement?

According to the 2024 Carls FDD, California franchisees should be aware of a liquidated damages clause within the franchise agreement. A liquidated damages clause is a provision that specifies in advance the amount of money one party must pay to the other in the event of a breach of contract.

In California, the enforceability of liquidated damages clauses is governed by California Civil Code Section 1671. This statute states that such clauses are generally enforceable unless they are proven to be unreasonable under the circumstances existing at the time the contract was made. This means that if a Carls franchise agreement contains a liquidated damages clause, it may not be automatically enforced if it is deemed unreasonable.

This disclosure serves as a warning to potential Carls franchisees in California, advising them to carefully review the liquidated damages clause with legal counsel to understand its potential impact and enforceability under California law. Franchisees should assess whether the specified damages are a reasonable estimate of potential losses resulting from a breach, as an unreasonably high amount may be deemed unenforceable.