bespeaks a state policy to prevent overreaching in the franchise
A. Choice of Law
In a diversity action, a federal court will apply the choice of
law rules of the forum state. See 28 U.S.C. § 1652; Klaxon Co.
v. Stentor Electric Mfg. Co., 313 U.S. 487, 496, 61 S.Ct. 1020,
85 L.Ed. 1477 (1941). Thus, New York's choice of law rules
governs which state's substantive law controls here. See
Schwimmer v. Allstate Ins. Co., 176 F.3d 648, 650 (2d Cir.
New York's "rules require that determination of contract
disputes be governed generally by the laws of the state with the
most significant contacts to the contract." Id. (citing In re
Allstate Ins. Co. and Stolarz, 81 N.Y.2d 219, 597 N.Y.S.2d 904,
613 N.E.2d 936 (1993)). As an exception to this general rule,
where, as here, the contract contains a choice of law clause, it
is the general policy of New York to enforce the parties' choice.
See, e.g., Rosenberg v. Pillsbury Co., 718 F. Supp. 1146, 1150
(S.D.N.Y. 1989) (enforcing choice of law clause in franchise
agreement for contract disputes). New York courts will, however,
decline to enforce a contractual choice of law selection if (1)
the law of the state selected does not have a reasonable
relationship to the economic activity, see A.S. Rampell Inc. v.
Hyster Co., 3 N.Y.2d 369, 381, 165 N.Y.S.2d 475, 144 N.E.2d 371
(1957), or (2) the state law chosen violates a fundamental public
policy of New York, see Cooney v. Osgood Mach. Inc., 81 N.Y.2d 66,
78-79, 595 N.Y.S.2d 919, 612 N.E.2d 277 (1993). See, e.g.,
Superior Funding Corp. v. Big Apple Capital Corp., 738 F. Supp. 1468,
1471 (S.D.N.Y. 1990) ("In a diversity action, a court
applying New York's choice of law rules will honor the parties'
selection of the law that should govern the dispute when the law
chosen has a reasonable relationship to the agreement and does
not violate public policy." (emphasis added)); Hunter v. H.D.
Lee Co., 563 F. Supp. 1006, 1009 (S.D.N.Y. 1983) ("Under New York
law, contracting parties may provide for the application of a
particular state's law as long as the contract bears a
reasonable relationship to the state whose law is chosen and the
application of that law does not offend the fundamental public
policy of New York." (emphasis added)).
The parties have failed to identify a sufficient "reasonable
relationship" between the franchise and Tennessee to warrant
application of the Agreements' Tennessee choice of law clauses.
See Finucane v. Interior Construction Corp., 264 A.D.2d 618,
695 N.Y.S.2d 322, 325 (1999) (contract carried out in New York,
but plaintiffs principle place of business was in Oklahoma; "even
if New York were deemed to have a greater interest in the
litigation, the fact that [plaintiffs] principle place of
business is located in Oklahoma is a sufficient basis to support
enforcement of the parties' contractual choice of law"). Holiday
is a Delaware chartered corporation with its principle place of
business in Georgia. Plaintiffs are both New York limited
partnerships with their principle places of business in New York.
Holiday franchises a number of important hotels in New York apart
from plaintiffs' hotels, and thus derives substantial continuing
revenue from its New York operations.
At the time the Agreements were entered into in 1990,
Holiday's headquarters was in Memphis, Tennessee. Since then
Holiday has closed its corporate center in Tennessee and moved
its headquarters to Atlanta, Georgia.
The fact that Tennessee once had a "reasonable relationship"
to the Agreements is not sufficient to justify applying Tennessee
law to the current dispute. The "reasonable relationship" of the
chosen state to the agreement must exist at the time of the
contract dispute, and not merely at some period in the past. At
present, it cannot be said that Tennessee has any interest in,
or relationship to, the Agreements or the franchise
relationships they establish. The Tennessee choice of
law provision in the Agreements are thus unenforceable under New
York choice of law rules.
This conclusion is buttressed by the fact that Holiday prepared
the Agreements. It follows that Holiday, and not plaintiffs,
affirmatively decided to impose its home state's law into any
contract disputes. No unfair or unforeseen hardship is now worked
on Holiday by declining to apply Tennessee law because Holiday,
by authoring the choice of law clause in an effort to avail
itself of the fruits of Tennessee law, but later removing its
corporate operations from that state, has through its own
actions eliminated the necessary reasonable relationship between
the franchise arrangements and Tennessee.
New York law governs this dispute because "New York is the
state most intimately concerned with the outcome," Andy Warhol
Foundation for the Visual Arts, Inc. v. Federal Insurance Co.,
189 F.3d 208, 214 (2d Cir. 1999), and because it has "the most
significant contacts to the contract." Schwimmer v. Allstate
Ins. Co., 176 F.3d 648, 650 (2d Cir. 1999). The
plaintiff-franchisees are both New York limited partnerships, the
hotels are located in New York near the state's two major
airports, and together, the hotels employee over 400 hundred
persons in New York, most of whom are likely to be New York state
B. Injunction as an Equitable Remedy
An injunction "is an equitable remedy issued by a trial court,
within the broad bounds of its discretion, after it weighs the
potential benefits and harm to be incurred by the parties from
the granting or denying of such relief." Ticor Title Insurance
Co. v. Cohen, 173 F.3d 63, 68 (2d Cir. 1999). To obtain
injunctive relief, a party must succeed on the merits of its
claim, as well as establish irreparable harm and inadequacy of
legal remedies. Id.; see New York State National Organization
for Women v. Terry, 886 F.2d 1339, 1362 (2d Cir. 1989); see
also Rodriguez v. DeBuono, 175 F.3d 227, 235 n. 13 (2d Cir.
1999) ("Although a showing of `irreparable harm' is required for
the imposition of any injunctive relief, preliminary or
permanent, the `imminent' aspect of harm is not crucial to
granting a permanent injunction." (internal citations omitted)).
1. Success on the Merits
In the absence of a New York statute specifically regulating
ongoing franchise arrangements, general principles of the common
law of contracts govern ongoing franchise relationships. See,
e.g., Rosenberg v. Pillsbury Co., 718 F. Supp. 1146, 1155
(S.D.N.Y. 1989). Nevertheless, as already pointed out above, New
York's policy requiring a reasonable balance of rights and
obligations of franchisors and franchisees warrants application
of equitable principles to the continuing relationship.
Plaintiffs state two bases for not allowing termination of the
Agreements now. First, they contend the Agreements were modified
either orally or through the parties' course-of-conduct to allow
an additional 60-day grace period in paying fees beyond the time
frame set out in the Agreements. Second, plaintiffs suggest that
Holiday has waived its rights both to terminate the Agreements
based on the April 1999 default and, by long-standing practice,
to enforce strict compliance with the Agreements' provisions for
payment of fees on the 15th day of the month following their
a. Contract Modification
Plaintiffs' first contention that there was either an oral or
course-of-conduct modification of the Agreements is without
merit. The Agreements provide that they can be changed or
modified only by a signed writing. "When a written contract
provides that it can only be changed by a signed writing, an oral
modification of that agreement . . . is not enforceable."
Tierney v. Capricorn Investors, L.P., 189 A.D.2d 629,
592 N.Y.S.2d 700, 703 (1993); see, e.g., Two Wall St. Assocs.
Limited v. Anderson, Raymond & Lowenthal, 183 A.D.2d 498, 583
436, 436 (1st Dept. 1992) ("There was no written memorialization
of this alleged modification of the lease, which by its terms
barred any oral modification."); Goodyear Pub'g Co. v. Mundell,
75 A.D.2d 556, 427 N.Y.S.2d 242, 243 (1980) (supervening oral
agreements would not alter parties' duties and responsibilities
where original agreement expressly provided "this agreement may
not be changed unless the parties to it agree in writing").
Plaintiffs proffer a letter from one of their own
representatives which they argue supports their understanding
that the 60-day grace period governed the franchises:
Dear Bob: I received your notice yesterday and I
spent time this morning with our [plaintiffs']
controller to see if we can embark on a payment
schedule to achieve your [Holiday's] goal of
bringing our payments to within sixty days.
Plfs' Ex. 6 (emphasis added) (Letter dated February 23, 2000,
from Gary Isenberg to Robert Massery at Holiday). Plaintiffs
contend that this letter, when considered with Holiday's failure
to explicitly reject the 60-day grace period in a response
letter, is sufficient to memorialize the modification.
This argument fails as a matter of law. New York requires that
the modification not only be in writing, but that it be signed
by the party against whom enforcement is sought. General
Obligations Law § 15-301 ("A written agreement or other
written instrument which contains a provision to the effect that
it cannot be changed orally, cannot be changed by an executory
agreement unless such executory agreement is in writing and
signed by the party against whom enforcement of the change is
sought or by his agent."). Plaintiffs have failed to identify a
writing signed by an agent of Holiday evidencing the alleged
Plaintiffs' contention of an oral or course-of-conduct
modification also fails as a matter of law from lack of
consideration. Cf. N.Y. General Obligation Law § 5-1103 ("An
agreement, promise or undertaking to change or modify, or to
discharge in whole or in part, any contract, obligation, or
lease, or any mortgage or other security interest in personal or
real property, shall not be invalid because of the absence of
consideration, provided that the agreement, promise or
undertaking changing, modifying, or discharging such contract,
obligation, lease, mortgage or security interest, shall be in
writing and signed by the party against whom it is sought to
enforce the change, modification or discharge, or by his
agent."). Though defendant provided consideration by foregoing
its right to payment on the 15th of the month following its
accrual, plaintiffs neither undertook a new obligation nor gave
up any right as consideration for a modification. See Tierney,
592 N.Y.S.2d at 703 ("Neither a promise to do that which the
promisor is already bound to do, nor the performance of an
existing legal obligation constitutes valid consideration [for a
contract modification]."); see, e.g., Taylor v. Blaylock &
Partners, L.P., 240 A.D.2d 289, 659 N.Y.S.2d 257, 259 (1997);
Two Wall Street Assocs. Limited, 583 N.Y.S.2d at 436; Foley v.
Pac Am or Bearing Inc., 105 A.D.2d 1120, 482 N.Y.S.2d 605, 605
(1984); Federal Deposit Ins. Corp. v. Hyer, 66 A.D.2d 521,
413 N.Y.S.2d 939, 944 (1979); Mattlage Sales, Inc. v. Howard
Johnson's Wholesale Div., Inc., 39 A.D.2d 958, 958-59,
333 N.Y.S.2d 491 (1972); see generally E. Allan Farnsworth,
Contracts §§ 4.21-4.22, at 271 (1982) ("All that the contractor
did in return for the new promise was to perform a duty that he
owed under an existing contract, and under the pre-existing duty
rule, performance of a pre-existing duty is not consideration."
Waiver is the voluntary abandonment of a known right which, but
for the waiver, would have been enforceable. Nassau Trust Co. v.
Montrose Concrete Products Corp., 56 N.Y.2d 175, 451
130 N.Y.S.2d 663, 436 N.E.2d 1265, 1269-70 (1982) (Meyer, J.).
Holiday, by not terminating on the April 1999 default for
nearly ten months, but instead essentially abandoning that right
until February 2000, waived its right to rely on that default —
as it seeks to do — as a basis for termination of the Agreements.
Holiday cannot now reach back to that default — and the notice of
termination given at that time pursuant to the Agreements but not
acted upon — to terminate the Agreements.
Holiday failed to give notice of termination as required by the
Agreements for the subsequent defaults. Plaintiffs having
essentially brought their payments current on those defaults,
Holiday is now foreclosed from relying on those as a basis for
termination in the absence of earlier notice of default on them.
c. Equitable Considerations Limiting Power to Terminate and to
Compel Strict Compliance with Fee Schedules
Holiday's notice of termination in April 1999 was based in part
on its unilateral revocation of its practice history of waiving
the Agreements' requirement of payment of fees on the 15th day of
the month following accrual. Through its course of conduct
Holiday had repeatedly waived its right to payment on the 15th of
each month and had instead allowed an additional 60-day grace
period. Plaintiffs came to rely on this pattern of waiver and to
build it into their own financial planning.