Side letter didn’t amount to a condition of the contract
The best way to incorporate terms as binding conditions is to express them in the contract – that was the advice of the Court of Appeal in a dispute between a large estate agency and one of its franchisees.
The case involved C21 London Estates and Maurice MacNeill Iona Ltd.
C21 was the master franchisor for the estate agency brand, "Century 21". Its franchise agreements contained standard terms, including clauses providing that the franchisee would pay royalties and other fees due promptly.
The agreement could be terminated by C21 for "good cause," meaning any material breach by the franchisee of its contractual obligations.
Potential defaults included a franchisee's failure to meet its financial obligations having been given 30 days’ notice.
Iona had been granted the right to operate the Century 21 brand in the Ilford area, and subsequently expressed an interest in acquiring the Chelsea area.
C21 granted the Chelsea franchise after being reassured that all fees due under the Ilford agreement would be paid. The obligation to pay those fees was confirmed in a side letter to the contract for the Chelsea franchise.
Iona later defaulted on its payment obligations under the Ilford agreement. C21 then terminated the Chelsea agreement. Iona claimed damages for the wrongful termination of the Chelsea franchise.
The judge found that the conditions in the side letter were not a term of the contract and C21 was therefore not entitled to terminate the Chelsea agreement.
The Court of Appeal has upheld that decision. It held that Iona's failure to pay under the Ilford agreement did not give C21 the right to terminate the Chelsea agreement. The terms of the side letter were not part of the contract.
It said that “the best way to incorporate terms as contractual conditions was to express that in the contract”.
Please contact Sing Li if you would like more information about the issues raised in this article or any aspect of contract law.