Take extreme care in the preparation and completion of Franchise Agreements

A recent franchising case has served to emphasise the extreme care that is required in the preparation and completion of Franchise Agreements.

In the case Dream Doors Limited were applying for an injunction against its former franchisee, Lodgeford Homes Limited and a Director of that company, Mr Martin Lodge.

In many respects the Franchise agreement was in a typical form. It contained a series of obligations on the part of the franchisee Lodgeford Homes Limited, and it also referred to a number of obligations being imposed on a “Principal”.

Dream Doors contended that it had been intended that Mr Lodge was to be named as the “Principal” in the franchise agreement. Dream Doors therefore asked the High Court to make an injunction against Mr Lodge personally to enforce what they contended were his obligations as principal. These included terms to the effect that Mr Lodge could not compete against Dream Doors for a specified period following termination.

However the difficulty for Dream Doors was that Mr Lodge was not named as a “principal” in the franchise agreement. Although Mr Lodge had signed the agreement, his position was that he had signed in his capacity as Director of the franchisee company, Lodgeford Homes Limited.

Mr Lodge contended that he had not intended to sign the agreement as principal and that he therefore had no personal liability, meaning that he could not be bound by the post termination non-compete clauses in the agreement.

On the hearing of Dream Doors’ application for an injunction requiring Lodgeford Homes Limited and Mr Lodge to comply with obligations under the agreement, the Court took the view that there were two possible interpretations of the situation.

The first was that Mr Lodge had signed on behalf of Lodgeford Homes Ltd (and not in his personal capacity as principal), and the other was that he had signed as principal only (and not on behalf of the company).

Having considered evidence relating to the circumstances in which the FA was prepared and signed, the court came to the conclusion that the only sensible interpretation was that Mr Lodge had signed on behalf of the company only. This meant that only the company was bound by its terms.

The Court took the view that the other interpretation (ie that Mr Lodge’s signature was on behalf of himself as principal only) would have meant that the Agreement was legally unenforceable.

This was because, on this interpretation, Lodgeford Homes would not have been a party as franchisee, which was difficult given that Lodgeford had acted as franchisee under the franchise agreement for several years prior to its termination

This case serves to emphasise the extreme care that should be taken in both the preparation and signature of franchise agreements. This is particularly so where, as in the Dream Doors case, one party to the agreement such as the franchisor hopes to impose personal obligations and liabilities on an individual.

Post termination restrictions, such as non-compete clauses are often seen by franchisors as a key tool for the protection of the franchisor’s business following termination of a franchise. However, these clauses are regarded by the Courts as being contrary to public policy since they have the effect of limiting competition.

Accordingly a franchisor who wishes to enforce restrictions of this nature is required to demonstrate that they are reasonable as a protection of the franchisor’s legitimate business interests. In addition, the court will be particularly careful to scrutinise the agreement containing the restrictions. As was the position in the Dream Doors case, the court will not hesitate to refuse to enforce the restrictions if there is doubt surrounding the question as to whether the restrictions are contained in a legally binding agreement.

As far as avoiding these pitfalls is concerned, it is of course prudent to have in place a rigorous system for managing the process of creating and amending the franchise agreement, and to make sure that all those involved in that process have suitable training.

If an individual franchisee is to sign the agreement as principal as well as Director, this needs to be made clear in the body of the agreement and the execution wording.

In the Dream Doors case there was a central conflict between the parties as to whether it had ever been intended that Mr Lodge would act as principal under the agreement. One way to head off this sort of issue is for a note to be made on file summarising the key terms that have been agreed in principle and which are to be included in the franchise agreement. Notes of this kind can then be produced later as evidence of the parties’ intentions in the event that there is a dispute as to whether the final franchise agreement correctly reflects the arrangements that each party intended.

Finally it is prudent for franchisors to require that the franchisee receives independent legal advice on the terms and effect of the agreement. A certificate can then be included this effect in the agreement itself.

Jacques Smith - Partner, Blandy & Blandy LLP Solicitors
Blandy & Blandy LLP acted for Lodgeford Homes Limited and Mr Lodge in the Dream Doors case