Christianity, Law, and Contracts

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19 Responses

  1. Patrick S. O'Donnell says:

    Why stop at Christianity? Let’s go back and re-examine the Hebrew Bible’s notion of covenant (and not just the adhesion contract between God and His ‘chosen ones’). A step in that direction took place here at CO last year with a post by Nate: http://www.concurringopinions.com/archives/2007/01/shechem_and_consideration.html

  2. Patrick S. O'Donnell says:

    Addendum:

    I should have said that we need not confine ourselves to Tanakh but might look at deposits (as it were) of oral Torah as well, such as the Mishnah and Talmuds.

  3. Carol Cross says:

    Ah! Yes! The theory of contracts and the manipulation of this theory in the regulatory scheme of the FTC Rule governing retail franchising in the United States economy is appalling. See AAFD’s Robert Purvin’s Comment #79 to the FTC in 1997 concerning the FTC Franchise Rule. See the testimony of Susan Kezios of the AFA to the Congress of the USA concerning the FTC Rule in 2002.

    Apparently, when the FTC/Congress determined to promulgate a federal rule, in the late 70’s, that would govern the sale of franchises in this country, they premeditated that contract law and not tort law would give greater protection to the franchisors and thus encourage franchising in our economy for the greater good –of the economy.

    However, when they took the sale of franchises out from under the purview of State common law fraud statutes, they produced a climate in which franchise contracts became malicious legal traps for franchisees, many thousands of whom would invest in retail franchises thinking that there was some government oversight of franchising in this country and only a very slight risk involved in the investment of hundreds of thousands of dollars in a retail franchise that is personally guaranteed by the franchisee.

    The great fraud in franchising today is made possible because of contract law and government regulation that works together to mislead inexperienced prospective buyers of franchises into unknowingly buying very high risk retail franchises in which they often lose their life savings. Some even commit suicide when they realize that the contract they signed protects the franchisor in arbitration and the courts.

    While the purpose of the Rule was said by the FTC to be to require the franchisors to make presale disclosure of certain material information to new buyers of franchises, the most MATERIAL information for the new buyer of the franchise, i.e., the unit performance statistics are not required to be disclosed to new buyers under the law. The FTC Rule and the signed adhesory and boilerplate contract does generally protect franchisors from claims of fraudulent inducement/fraudulent concealment in mandated arbitration and mediation and in the state and federal courts. Innocents sign the contracts in which they give up their due process rights because they think that this is the only way they can access the profits promised and implied outside of the actual franchise agreement.

    The result is that thousands and thousands of buyers of franchises enter into the contractual relationship without being informed of the actual risk of failure and lack of profitability that is KNOWN to the seller of the franchise, the franchisor.

    This immoral, unChristian, and unethical regulatory policy that is protected by contract law has been supported by the status quo and the special interests for almost 30 years.

    Would that your “third theory” would allow for the FTC mandated disclosure of unit performance statistics by the franchisor to the new buyers of the franchise and to investors in the franchisors. If franchising cannot stand in our economy and in the economies of the world without TRUE disclosure to the buyers of retail franchises of the risks as known to the franchisors, should franchising be growing in the US and World Economies?

  4. David Opderbeck says:

    Patrick, good observation about the Hebrew Bible. In fact, the first chapter in Witte and Alexander’s book is “Law and Religion in Judaism” by David Novak, which recognizes the close ties between much Christian and Jewish legal theory rooted in the Hebrew Bible. Berman’s essay doesn’t delve much into this, but the Puritan emphasis on community that he mentions is tied directly to the Hebrew Bible’s narrative of God’s covenants with Israel.

    Your reference to those covenants as contracts of adhesion, however, shows one place where analogies between them and contemporary contract law break down. They are more like ancient near eastern suzerain-vassal treaties, which were conceived of as gracious grants from a sovereign to a subject, rather than presumptively quid pro quo bargains.

  5. Patrick S. O'Donnell says:

    (I was just having a bit of fun with the contracts of adhesion reference/analogy.)

  6. Quidpro says:

    Carol:

    You paint a picture of rampant greed on the part of unspecified franchisees. You then demand that government pass new regulations to rectify this perceived problem. Why must the government solve this purported problem?

    People become franchisees hoping to reap financial gain. Are they not in the best position to protect their own interests? Even if the FTC does not require the disclosure of certain information, it does not follow that the franchisees are prohibited from asking for the information.

    As the Puritans recognized, we live in a fallen world. The government in general, and the FTC in particular, are no exception to this condition. Perfection cannot be legislated.

  7. Carol Eblen says:

    Quidpro! You are not dealing with the reality of ineffective regulation devised by the FTC that was presented to the public in the late 1970’s as serving the interests of the franchisees. but that was actually a subsidy of the franchisors, the banks and the lenders, and the landlords with their 3-net leases.

    Apparently, you don’t know a lot about retail franchising and the FTC Rule. It is against the law to provide information concerning earnings etc.. outside of the government mandated disclosure document.

    After almost thirty years of the Franchise Rule, only a small percentage of franchisors provide any “earnings claims” in the mandated disclosure circulars because the disclosure of this material information is optional and not material under the FTC Rule.

    Mandated disclosure of unit performance statistics would reveal low profitability or no profitability in some franchise systems as well as substantial failures of first owners of the franchises who build and work in the physical units that wear the brand names. These first owners of franchises often become a part of a churning mechnanism that some franchisors develop as a management tool.

    Franchisee advocates have indicated to the FTC and the Congress that their failure to mandate that franchisors disclose material UNIT financial performance statistics to new buyers is a fatal flaw of the FTC Rule and is misleading by omission.

    Robert Purvin, the author of Franchise Fraud, also stated to the FTC over ten years ago that the primary intent of the FTC Rule appeared to be to protect franchisors from common law fraud claims from franchisees.

    Yes! we live in a fallen world but why is it necessary to defend immoral, unethical and unChristian regulation of franchising by the FTC? Perfection cannot be legislated but should guile and trickery be legislated and rationalized as serving the public good?

  8. Quidpro says:

    Carol:

    We seem to talk past each other. I do not defend these unspecified franchisors who so inspire your ire. Since they have not been identified, I do not even know of whom you speak. I agree that disclosure of material financial information is crucial to making informed financial decisions. So who should request the disclosure of this information?

    We appear to have differnt philosophies on the role of government. You apparently believe that it is the role of the FTC to save people from their own stupid decisions. I believe that those who look to the government for salvation will be sorely disapointed. It follows, from my view, that patriachal governmental decrees should be kept to a minimum.

    Each of us are moral agents, franchisees and franchisors included. To hold that some are too stupid or incompetent to make decisions for themselves is demeaning.

  9. Carol Eblen says:

    Quidpro:

    You miss the point! These unspecified franchisors just do what they CAN DO under the current state of the law surrounding franchising. They have immunity under the law to lie, cheat, and steal as long as they get a signature on the unbarbained, long-term indenturing and binding unilateral contract, and as long as they are compliant with the FTC Rule. This, obviously, is the effect of the FTC Rule if not the actual intent.

    It is the “constructive fraud” of the package of a mandated government disclosure document and an “unbargained” boilerplate, adhesory contract that disarms even the smart and the competent who believe that the federal government wouldn’t regulate franchising if they didn’t intend to provide protective oversight for the consumers of retail franchises.

    The appearance of the legitimacy of the franchisor that is provided by mandated government disclosure does lull prospective franchisees into a false sense of security. It is the government who puts the lipstick on the pig and pimps for the franchisors. (Recently, in the UK, the Minister of Industry declined to “especially” regulate franchising because she didn’t want to provide a false sense of security to returning VETS.)

    In the government’s zeal to provide franchisors with incentives to stimulate local economies, they have offered up franchisees as expendable resources for the franchisors.

    The SBA subsidizes franchising and the VA and VET Fran offer discounts on franchises with very high failure rates or unprofitability for first-owner franchisees. In June of 2007, the SBA offered the pilot program of the Patriot Express Loan to Vets and their families who are now targets of the franchisors.

    The Courts become part of the “package” because of the necessity to uphold the terms of the contracts, that so often become commercial paper sold in our free markets.

    I think you know, Quidpro, that franchising picks up in recessions because of the lack of jobs and the NEED of many to look for self-employment opportunities. These job seekers don’t understand that it is “stupid and incompetent” regulation of franchising by the government that will set them up for the franchisors, who use contract law like a gun to hold their franchisees captive and shoot them down as needed.

  10. Quidpro says:

    Carol,

    I understand quite well the point you make with such melodramitic flair. The evil franchisors exploit the innocent but incompetent franchisees, who enter into important business transactions with little financial understanding and no legal representation….

    I even agree with you, in part. The Government should not subsidize foolish decisions. Just as Fannie and Freddie should not have encouraged sub-prime mortgages, so the SBA should not subsidize sub-prime franchises.

    But why would the franchisors enter into contracts with people who are so obviously unable to meet their obligations? What profit is there in investing in franchisees that will only fail, owing the franchisor thousands? If the unidentified franchisors of your tale repeatedly enter into agreements with people who cannot meet their obligations, they will fail along withn their franchisees.

  11. A.J. Sutter says:

    Apropos of Berman’s comment, ”[w]e may learn from history . . . that there is a third possibility: to build a new and different theory on the foundation of the older ones,” and the mention of Jewish religious law: there are at least two possible motivations for looking at these sources, each of which suggests a different scope of inquiry.

    One is historical: what are the contributions religious law has made to our current system? In this context, I’d slightly modify Patrick & David’s suggestion: the Old Testament could be apposite — but less so in its Hebrew, and more so in its Vulgate, vernacular, etc. versions. Halakhah (Jewish religious law) as expressed in the Talmud, rabbinical responsa, etc. is probably less relevant, given who was calling the shots during most of Western history.

    The other is comparative and possibly forward-looking: regardless of how our system got to where it is now, how do other legal systems think about the problems we are trying to deal with, and do they have anything to teach us? Here not only Halakhah, but also shariah/fiqh, specific civil law systems, various Asian legal systems, etc. may have a lot to offer.

    Some might be tempted to narrow the second task, on the logic that Berman’s term “foundation” suggests we should limit our forward-looking inquiry to the legal traditions that have actually influenced us so far. If you accept that reasoning, then once again I don’t think Halakhah is so relevant. But I do think that both the heterogeneity of the US population and the need for creative new ideas in law should lead us to be more catholic in our comparative endeavors.

  12. Patrick S. O'Donnell says:

    Should anyone want to take up A.J.’s suggestion to be “more catholic in our comparative endeavors,” I have a basic bibliography for “comparative law” available here: http://www.jurisdynamics.net/files/documents/Comparative_Law_Biblio.doc

  13. Carol Cross says:

    Quidpro: I have ordered this book “Christianity, Law and Contracts” from Borders because I was shocked to discover that our “secular” government does indulge in dishonest, immoral and unethical promulgation of the rule of law that is then rationalized as serving the “greater good.”

    Is your perspective, from wherever it is you stand, demonstrated when you ask “But, why would the franchisors enter into contracts with people who are so obviously unable to meet their obligations?”

    Again, it appears that you (like the Congress of the US) know little about the actual nature of the franchisee-franchisor relationship. Or, perhaps you know a great deal about the relationship and support churning and the ugly status quo of the law surrounding franchising because it serves your interests in some way.

    Obviously, when the retail franchisors capture the cheap labor and the cheap “venture” capital of franchisees, they know that the personal guarantees on the long-term 3-Net leases as well as on the franchises themselves will ensure that the franchisee will work very hard for some unknown period of time to attempt to break even.

    The startup franchisee will produce royalties and commissions, etc. for the franchisor on the gross sales, not the profits, from the first day the business is open to the public until they complete their contracts or are early terminated, or sell their rented business opportunity –and whether or not there are ever any actual profits for the franchisees.

    If, after a year or two or even more, the startup franchisee fails, this is NOT a failure for the franchisor if the tangible and intangible assets of the failure are acquired by a second-generation franchisee who may have a better opportunity to break even because the business assets were purchased from the “squeezed” failed franchisee or from the bank or lender for pennies on the dollar.

    The long-term franchise agreements and leases, 10 and 15 years, involve malice aforethought for those franchisors who use the status quo of the law to indulge in churning and pumping and dumping of the physical units that wear their brand names.

    Strangely, the Commerce Department stopped collecting statistics on franchising several years ago. The only statistics available on franchising and startups indicate that only a small percentage of startup small businesses survive the first five years. (Do a Google Search on Small Business Startup Failure Rates)

    Of course, all franchisors would be delighted if all of their newly recruited franchisees were successful but the reality is that always a certain percentage of franchisees will fail to attain break even before they have exhausted financial resources and are unable or unwilling to acquire more debt.

    Obviously, the FTC regulated franchising to protect the franchisors from that certain percentage of those franchisees who would fail to thrive, and who would want to arbitrate or litigate the reasons for the failure, whether it be fraudulent inducement to contract or breach of contract.

    Obviously, the Regulators hoped that franchise failures would stay under the radar because most failures would fail into silence because of lack of resources. Obviously, the Regulators hoped that the checks and balances provided by the due diligence of the banks and lenders and the SBA would prevent the situation from getting out of hand.

    However! franchising grew along with the housing bubble in our economy as more and more prospective franchisees used their home equity in loans to finance the purchase of a retail franchise. The banks and the lenders reduced their due diligence on franchise loans and if “failed” franchisees continued to pay on the home equity loans, the banks or the SBA, of course, would not be aware of the actual failure rate of first-generation startup franchisees in franchise systems.

    Only when franchisees started to default on their home equity loans would the banks and lenders be aware of defaulting franchisees in franchisor systems.

    Franchisors started to borrow money under securitization arrangements starting in 2000 and now the government will not do anything by way of moral regulation of franchising that will in any way undermine the securities based on the cash flow of royalties and premiums paid by franchisees that were purchased by innocent investors.

    Further, government has supported franchising in the economy because franchisors can continue to stand during recessions if they can conmtinue to sell new startup franchises out the front door and firesale the tangible and intangible assets of failures out of the back door of the franchise systems.

    The original sin of the FTC in falsely indicating that they are regulating franchising to protect the franchisees taints our legal system. The government should not subsidize the franchisors by helping them to obscure the actual and KNOWN risk of the investment from new buyers of franchises. The government should not be selling “fraud insurance” to the franchisors.

  14. Quidpro says:

    Carol:

    How can you be so cruel? First you compare me to Congress! Then you expose me as an advocate for “the ugly status quo” of American franchising law! Now that you have unmasked me, you will no doubt send me to a re-education camp.

    Perhaps there, I will learn these strange new economic arrangements, that are so obvious to you, where franchisees continue to pay royalties to their evil franchisor masters even as their children starve and their homes are sold at foreclosure. Maybe there I will finally learn the dark secret identity of these all-powerful franchisors who, contrary to all previously known laws of economics, have prospered by selling goods and services to people who “obviously” cannot repay them.

  15. A.J. Sutter says:

    Some contributions to the franchise debate have been interesting, but maybe the participants could explain why this is the paradigmatic (iconic?) illustration of the theme of Christianity and the law. Why this issue more so than, say, slavery, various forms of discrimination that were allowed in the US before the 1960s, pro-creditor reform of the bankruptcy laws, the deception of investors resulting from government tolerance of “off-balance sheet” financial instruments, the termination of pension and healthcare benefits to retirees, etc.?

  16. Carol Cross says:

    A.J. Sutter brings up a good point. The dishonesty of government as demonstrated in franchising is not perhaps THE paradigmatic illustration of the theme of Christianity and the law.

    The law in the United States has often supported many immoral, unethical, and unChristian practices that were long-standing violations of human rights – such violations as now defined by the growing consciousness of the more informed masses who want a living Constitution.

    The law was manipulated to allow the dangerous practices in the financial markets in the interests of those who wanted “product” and profits. This hasn’t played out but we all know it is bad news for the American people.

    Franchising, however, publicly illustrates how law and process can be manipulated by government to support public policy goals through the vehicle of the government lie.

    The rationalization of “Caveat Emptor” just doesn’t cut it with me. The Parable of the Broken Window is in play in franchising and the license to lie, cheat, and steal from the innocent is rationalized as serving the “greater good.”

    Thou shalt not stesl!

  17. Ray Borradale says:

    While Carol may get a little hot under the collar she has accurately covered many aspects of franchising that world-wide have a rolling constituency of victims of fraud.

    These were mom and pop operators who lost between substantial to everything because governments will not acknowledge that franchise churning is considerably more profitable in the short term con than quality franchising.

    It isn’t difficult now to google franchising scams, fraud, victims etc to reveal the many colours and levels of franchising fraud.

  18. John says:

    Carol’s minority and specious view is a rant she uses on website after website to promote her families vendetta against all of franchising because of her family’s failure as a UPS franchise.

  19. Carol Cross says:

    I accept that I may represent a minority view but the dissertation in the American Business Law Journal, 01 January 2003, (published on the Internet in mid 2008) entitled Franchising Fraud: the continuing need for reform” which is a “library paper” confirms all that I have said in my postings.

    It is gratifying to know that some members of the legal profession are not afraid to tell the truth. But! It is disturbing to know that the ABA and its members generally support the use of law and process and captured regulation to support this scheme because it serves their financial interests.

    The prospective franchisees ARE a premeditated sacrifice to the goal of franchising in our economy and the government lie of the FTC Rule continues to enable fraud in franchising because MATERIAL RISK FACTORS apparently can be withheld by the franchisors with immunity under current law and practice.

    Hopefully the higher courts will look at the constructive fraud of adhesive non-bargained contracts that are packaged with government mandated disclosure circulars that permit franchisors to hide from view of the buyer of the franchise (and, importantly, from view of the investors in the franchisor’s commercial paper) the unit failure rate and profitability of the franchises offered for sale.