My word is my bond –franchise agreements can be made and varied orally and by conduct
Three recent cases in the UK Court of Appeal have illustrated the dangers of assuming that the written word in legal agreements is set in stone.
Pre-contractual documents, such as heads of terms, often contain a statement that they are not legally binding and commercial contracts often contain a "boilerplate" clause stating that any variations to the agreement must be in writing and signed by both parties. Whilst these statements and clauses are useful and are designed to create greater legal certainty, they are not bullet proof and it is possible for the parties to make or vary a legal contract orally or through conduct.
Businesses, including those in the franchise sector, should take note of these judgments and consider how best to mitigate the consequential risks.
1. Reveille Independent LLC v Anotech International (UK) Ltd
This case involved a dispute about whether a binding contract had been created.
Anotech had been negotiating with Reveille to obtain a licence to use the "Masterchef" brand to market its cookware products in North America and for the products to appear in three episodes of the television programme, "Masterchef".
Reveille drafted a deal memo, which stated it would not be binding on Reveille until it had been signed by both parties. Anotech returned a signed copy of the deal memo to Reveille. However, the copy had been amended in manuscript and it was not signed by Reveille. It was the intention of both parties that the deal memo would be replaced by a detailed agreement in due course but eventually negotiations broke down.
In the meantime, the television episodes featuring the products had been recorded and broadcast and Anotech had used the brand at home shows and in its sales literature for the products. Reveille subsequently sent an invoice to Anotech for payments due under the licence. Anotech did not pay the invoice and Reveille sued for the payments on the basis that there was a binding contract on the terms of the amended deal memo, even though Reveille had not signed the deal memo. Anotech argued that no binding contract had been concluded.
It was clear that Reveille had carried out the work envisaged by the deal memo and stuck to 'their side of the bargain'. Anotech argued that this had been done in anticipation of a binding contract, rather than under the terms of the deal memo. However, the Court of Appeal disagreed and held that Reveille could demonstrate its acceptance of the deal memo by conduct and that the recording of the television episodes and various other acts did constitute conduct by Reveille accepting the deal memo, notwithstanding that they had not signed it. The conduct of both parties indicated that they believed there was a binding contract in place.
The case shows the dangers in proceeding to act as though a contract were in place, despite a wish not to be bound until contractual formalities have been completed. Franchisors which issue non-binding heads of terms should note that if the parties start to perform obligations before the franchise agreement has been completed, there is a risk that the parties are already bound together contractually.
2. MWB Business Exchange Centres Ltd v Rock Advertising Ltd
This case involved a dispute about whether a binding contract had been varied orally.
The business was not successful and it fell into arrears on payments under the licence. MWB sought to terminate Rock's occupation based on the arrears and Rock argued that the licence had been varied orally and that the licence fee payments had been rescheduled. The first of the revised payments had been accepted by MWB. The licence itself stated that all variations must be agreed, set out in writing and signed on behalf of both parties.
The Court of Appeal held that an oral agreement had been made and that it was important to respect the autonomy of the parties and the principle that "whenever two men contract, no limitation self-imposed can destroy their power to contract again."
Although the variation was not, strictly speaking, for consideration, the commercial benefits of having a revised payment schedule was felt to be sufficient consideration and therefore the variation was binding.
Franchisors should exercise caution before terminating franchisees for breach of contract to ensure that no prior oral variations were made in respect of the breaches. It is imperative that franchisors ensure that their franchise managers receive appropriate training on this risk and that the company establishes policies and procedures to mitigate the risk of disconnect between the written legal agreement and how the agreement is actually is being performed in practice.
3. Globe Motors Inc v TRW Lucas Varity Electric Steering Ltd
Whilst this dispute did not revolve around the issue of anti-oral variation clauses, the Court of Appeal took the opportunity to make non-binding but persuasive comments on such clauses and their effect.
TRW was a manufacturer and entered into an exclusive supply agreement with Globe. TRW started to make purchases from a third party supplier and Globe and its Portuguese subsidiary, which participated in the supply chain to TRW, sued for breach of contract. One of the issues in dispute was whether the agreement had been varied to include the Portuguese subsidiary as a party to the contract.
The Court of Appeal took the view that a contract containing a standard anti-oral variation clause can still be varied by a course of conduct or by an oral agreement. The Court of Appeal confirmed the importance of the contracting parties' autonomy to the contract to vary as they please.
Anti-oral variation clauses do still retain value as the presumptive starting point, requiring a party seeking to rely on an oral variation to show clear evidence in support of this. Although the comments were persuasive and not binding, it is likely that future judgments will arrive at the same decision, and indeed the case above swiftly followed this decision.
These cases illustrate the general principle that binding contracts, or contractual variations, can be made by word of mouth or by conduct and do not need to be set out in a formal document.
This can be a particular issue for franchisors or larger companies with separate procurement or legal teams negotiating formal agreements, whose efforts may be undermined by the conduct of personnel "on the ground". It is important to be vigilant to the risks of any divergence between the legal agreements and the ancillary commercial and operational policies, procedures and communications. The best way to mitigate this risk is to ensure that the legal and commercial divisions of a business communicate effectively and that a system of protocols and regular training is put in place.
Anti-oral variation clauses and statements regarding the non-legally binding nature of a document do have some practical effect. Where an agreement contains such a clause, a party hoping to rely on informal communications or conduct to modify its contractual obligations may have greater difficulty in showing that both parties intended the communications or conduct to alter their legal relations.
Finally, it is important to note that certain type of contracts can only be varied by a written deed; for example, contracts dealing with an interest in land, such as leases as opposed to a bare right of occupation contained in a licence, as mentioned above.