Franchise Agreements: the importance of taking legal advice. The Dream Doors Ltd v Lodgeford Homes Ltd case

Director may be personally liable for signing as principal

It is, of course, important to ensure that the correct parties sign an agreement to avoid the unintended consequence of having to determine at great expense through the courts who they are and who is actually liable under the agreement, as the ongoing case of Dream Doors Limited -v- Lodgeford Homes Limited and Martin Lodge serves to highlight.

Dream Doors Limited had entered into a franchise agreement in 2008. The agreement was expressed as being between that company (as franchisor) and Lodgeford Homes (as franchisee). The director of Lodgeford Homes Limited (Martin Lodge) signed the agreement in his personal capacity above the typed words “as a principal” which appeared at the end of the document. He was not, however, named as a party at the front of the agreement.

Dream Doors Limited had terminated the franchise agreement as it was claiming that Lodgeford Homes Limited was in breach of its terms. The agreement contained various obligations that commonly apply following termination of a franchise agreement (including an obligation not to compete with Dream Doors Limited for a specified period of time). Dream Doors Limited sought to enforce these obligations against both the company and Martin Lodge by applying for an injunction claiming that they were both parties to the franchise agreement and that Mr Lodge had signed it in a personal capacity (as principal) and was therefore personally liable under the agreement. Dream Doors Limited also claimed that the franchise agreement should be rectified to include Mr Lodge as a named party to the agreement as his name had been omitted by mistake. Mr Lodge denied that he was a party to the agreement and claimed that he had signed in his capacity as director on behalf of Lodgeford Homes Limited.

The High Court held that Mr Lodge was not a party to the franchise agreement and struck out the claim to have it rectified.

The Court of Appeal, however, took a different view. It found that the High Court should have considered the wider circumstances surrounding the signing of the agreement including the events leading up to it as well as discussions that had taken place. For example, the franchise agreement had replaced an earlier one that had been entered into between Dream Doors Limited and Lodgeford Homes Limited in 2007 and both Mr Lodge and his then co-director had both signed a separate personal guarantee / indemnity on the same day. In addition, the High Court had failed to consider the evidence relating to the production and drafting of the franchise agreement including Dream Doors Limited’s explanation as to how the drafting mistake had arisen. Instead, the High Court had focused only on the circumstances at the time that the franchise agreement was signed, for the purpose of determining whether it should be rectified. At the time Mr Lodge had signed the agreement, the person witnessing his signature (an employee of Dream Doors Limited) had told him that he wouldn’t be personally liable under the agreement.

The Court of Appeal concluded that, as evidence supporting Dream Doors Limited’s version of events had largely been ignored, the High Court had been wrong in its decision to strike out the claim against Mr Lodge. The Court of Appeal has sent the case back to the High Court for a re-hearing. Consequently, it is quite possible that a different outcome may be reached at the High Court at the re-hearing and Mr Lodge may be found to be personally liable under the franchise agreement.

This case offers some valuable lessons. From a franchisor’s perspective, a proper review of the legal documentation used should be undertaken by a solicitor to ensure that it is correctly drafted, the process for producing documents should be properly checked and correctly implemented and staff of appropriate seniority should be involved in overseeing the process and receive training so that they are aware of the correct formalities required. From a franchisee’s perspective, independent legal advice should be sought before signing a legal document and, certainly in the above case, this step would have helped to identify whether a director would have been personally liable.