Variation on a Theme - do Variations to Franchise Agreements have to be in writing and signed by the parties?

The short answer, following two recent Court of Appeal decisions, is "unlikely" even if that is what the franchise agreement says.

There are an estimated 44,000 franchisee businesses in the UK. Behind each franchise is a franchisor. That franchisor has to manage its relationships with many, and in some cases hundreds of franchisees.

Because of the administrative burden of managing multiple franchisee relationships, franchisors prefer to take a 'standard form' approach - avoiding individually negotiated relationships in favour of a network standard  agreement applicable to all franchisees.  This has the further benefit of avoiding difficulties when one franchisee discovers another franchisee enjoys more advantageous terms than it does. 

For these reasons and more, franchisors and franchisees value certainty in what has been agreed between them and both have an interest in maintaining this certainty for the lifespan of their contractual relationship. This is why, invariably, Franchise Agreements will have what is known as an "anti-oral variation clause" which is effectively a clause that seeks to prevent the parties agreeing to oral variations to the existing written terms.

Typically such a clause would require any variation to be in writing and signed by the parties, before it can be considered binding. This is a sensible way of governing change, which is relatively easy to observe even in the most fast paced commercial environments. This approach avoids costly misunderstandings between the parties.

The Court of Appeal has however, in a recent decision, prioritised the parties' freedom to agree variations and has declared that the parties' ability to vary terms should not be fettered by previous agreements to follow a specific formula for variations. Therefore, if the Court is satisfied that a variation has been lawfully agreed, it is now likely that the Court will not insist on strict compliance with the formalities of an anti-oral variation clause.

What Does that Mean in Practice?  

Does that mean that anti-oral variation clauses are now worthless? The answer is "no", and it is anticipated such clauses will remain as standard in Franchise Agreements. The reason for this is that the clause still points the parties to best practice for varying the terms of a Franchise Agreement. Most franchisees and franchisors will appreciate that if they are seeking a variation required by the franchise agreement to be in writing then any "informal" orally discussed variations are less likely to be relied upon.

In addition, the Courts are unlikely to simply ignore such clauses. In practice, whilst parties may not be able to rely on such clauses as an enforceable prohibition on oral variations, they are likely to argue that the existence of an anti-oral variation clause means that they never intended the oral variation in question to be binding (if they had they would have put it in writing as per the clause).

To put it another way, if a dispute arises about an oral variation, the existence of an anti-oral variation clause may be relied upon as evidence that the parties did not have the "intention to create legal relations" (a vital ingredient of a binding variation). This would mean that the Court would have to consider whether the parties had actually agreed to a legally binding variation in the context of an anti-oral variation clause.

Practical Steps

Practical Steps - franchisors should continue to treat the "anti-oral variation" clause as the norm in terms of best practice and continue (or start) to require any variation to be in writing and signed by both parties. Franchisors should consider introducing increased formality around the process of requesting a variation to the franchise agreement such as a pro-forma request form to be completed by the franchisee. This may create an additional hurdle and evidence against an oral variation.

Franchisors should also now consider what, if any, oral variations may have historically been agreed inadvertently and if appropriate seek to formalise the variation. Where in practice the anti-oral variation clause has been previously ignored, franchisors should revert to the formal position in order to reduce the risk of undesirable variations coming into effect in the future. Franchisors should perhaps considering notifying the franchise network that the franchisor does not, at any time, intend to vary the franchise agreement unless in writing and signed by the parties. 

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