Franchise agreements: Sign on the dotted line – part two
The recent case of Dream Doors Limited v Lodgeford Homes Limited & Anor  EWHC 1663 (QB) highlights the need to make sure that your franchise agreements are executed correctly and by the correct parties.
This may seem an obvious point to any franchisor but, if not carried out correctly, you run the risk of not being able to enforce the terms of your franchise agreement against all of the parties you think you should be able to enforce it against.
Dream Doors made an application for injunctions against the defendants, Lodgeford Homes Limited and Mr Martin Lodge, on the basis that Lodgeford Homes had been in breach of the terms of a franchise agreement entered into with Dream Doors in 2008 as a result of which Dream Doors were entitled to terminate the agreement. As is usual on termination of any franchise agreement, various restrictions were placed on the activities in which the outgoing franchisee was allowed to participate for a certain period of time after the agreement had terminated. The application for an injunction was sought by Dream Doors to require Lodgeford Homes and Mr Lodge to comply with what was said to be their contractual obligations following termination.
It was accepted that the first defendant, Lodgeford Homes, was a party to the 2008 franchise agreement, had acted in such a way that entitled Dream Doors to terminate the agreement, and should be bound by the post-termination obligations and restrictions set out in the agreement. As such, the application against Lodgeford Homes for an injunction was successful.
Turning to the case against Mr Lodge, the application was not quite as straightforward. Mr Lodge argued that he personally was not a party to the franchise agreement and, accordingly, was not bound by the provisions contained within it. On the face of the agreement, it appeared to have been made between Dream Doors and Lodgeford Homes and there was no mention on the front page of Mr Lodge being a party to it. The agreement did contain references to a “Principal”. However, this term was not defined. At the end of the agreement where the signatures had been added, there were two signatories for Dream Doors and one other signature – that of Mr Lodge. He had signed following the words “signed by Martin Lodge” beside the word “signature” in brackets and above the words “As a principal”. Mr Lodge’s signature had also been witnessed by Dream Doors' then regional manager.
On the basis that Mr Lodge had appended his signature to the franchise agreement, Dream Doors argued that he too should be subject to the post-termination obligations and an injunction granted to enforce these. Various alternative arguments were put forward to sustain the application.
The first argument put forward was that as well as Lodgeford Homes agreeing to be a franchisee of Dream Doors, Mr Lodge was also a signatory and a party to the agreement as a principal to guarantee the performance by Lodgeford Homes and to accept liability as a principal. However, the judge gave this argument short shrift stating that there was only one signature on the agreement and “principal” was not defined.
The second argument tried by Dream Doors was that Lodgeford Homes had not signed the agreement on its behalf but it had at all relevant times held itself out as a franchisee. This was coupled with a claim that the agreement had been signed by Mr Lodge expressly as principal although he was not stated as a party to the agreement. Again, the judge was not impressed by this argument and found it lacking in force.
The last argument was that, on a proper construction of the franchise agreement, Mr Lodge was a party to it as principal and the agreement should be rectified to reflect this. Two reasons were given why the agreement should be so rectified:
- it was the parties’ common intention that Mr Lodge would be a principal under the agreement, this intention had been expressed during earlier discussions between the parties and, by mistake, the agreement did not reflect that common intention; and
- Dream Doors believed that the agreement contained a term naming Mr Lodge as principal when it did not, Mr Lodge was aware of this omission and it was due to a mistake by Dream Doors, and he did not draw the mistake to their attention as the mistake was to his benefit.
The judge gave more serious consideration to this last argument and what the correct construction of the agreement should be. Were Dream Doors successful then? Unfortunately not.
The decision at first instance
The judge thought that there could be two logical possibilities for the construction of the agreement but neither of these was to Dream Doors’ benefit. The first possibility was that the agreement was between Dream Doors and Lodgeford Homes and signed on behalf of Lodgeford Homes by Mr Lodge. The second possibility was that the agreement was never made between the parties stated to be the parties, because it was never signed by the franchisee, but somehow became an agreement between Dream Doors and Mr Lodge as principal.
The judge felt that the second possibility was unsustainable and the agreement would be ineffective for want of consideration in those circumstances. Accordingly, the sensible construction (backed up by evidence given by Mr Lodge and the regional manager who had witnessed his signature) was that the agreement was between Dream Doors and Lodgeford Homes and had been signed by Mr Lodge on behalf of Lodgeford Homes. Mr Lodge was, therefore, not a party to the agreement and so not bound by any of its provisions. The judge dismissed the claim on the basis that there was no serious issue to be tried.
Dream Doors appealed the decision to the Court of Appeal.
On appeal, the Court disagreed with the decision at first instance on the grounds that the judge had incorrectly failed to take account of the wider circumstances leading up to and surrounding Mr Lodge's signature of the franchise agreement and which should have been considered in an action for rectification. Firstly, the judge failed to take account of the fact that the franchise agreement replaced an earlier franchise agreement between Dream Doors and Lodgeford Homes and a separate guarantee/indemnity signed by Mr Lodge and his fellow director, Mr Forde, under which they guaranteed Lodgeford Homes' performance of its obligations under the franchise agreement. This served as an indication that Mr Lodge was willing to act as principal. Secondly, the judge failed to take account of the witness statements given by Troy Tappenden, the managing director of Dream Doors', in support of Dream Doors' assertion that Dream Doors believed Mr Lodge was acting as principal under the franchise agreement and that there had been a fundamental mistake in the way the agreement had been executed.
On that basis, the court decided that, contrary to the decision reached at fist instance which had only looked at the nature circumstance of the physical signing of the franchise agreement, there was a serious issue to be tried in relation to rectification of the agreement. In the Court's opinion "something had very obviously gone very wrong" with the production of the agreement. The Court has referred the case back to the High Court for a re-hearing on the question of whether injunctive relief should be granted against Mr Lodge personally.
Although the case may come to a different conclusion after the re-hearing, it serves as a timely reminder for franchisors to check carefully that the intended parties are correctly named and defined in franchise agreements and that all of those parties then sign the agreement. If they are not, franchisors may find themselves in dispute with their franchisees and/or principals over the contractual arrangements and unable to enforce crucial post-termination restrictive covenants and obligations leaving the intended “principal” free to walk away and compete immediately.
The process of arranging sign-off of franchise agreements and insertion of party details is often dealt with by junior staff or by staff with little understanding of the legal niceties surrounding how contracts should be executed. To help avoid the difficulties faced by the franchisor in this case, you should ask your solicitor for a checklist of how and who should sign each type of franchise agreement that you issue and ask for advice if you have any doubts or questions.