What’s the point of a side letter?
5 March 2019
Rating system:
Reading time (1-10 minutes): 1 or 2
Sophistication level (1 (idiot) – 10 (expert)): 5
Entertainment value (1 (turgid) – 10 (side-splitting)): 5
Background
It’s interesting to compare the C V Buchan Ltd v Hyder Consulting (UK) Ltd case (discussed here) with another recent Court of Appeal case. In this case an estate agency (C21 London Estates) had granted a franchise of its ‘Century 21’ estate agency business to Maurice MacNeill Iona Ltd (‘Iona’) to cover the Ilford area. The franchise agreement had standard terms requiring the franchisee to pay royalties and other fees promptly, and entitling C21 to terminate the agreement for any material breach of the agreement, such as failure to make late payments even after an agreed notice warning period.
Iona wanted to acquire an additional franchise to cover the Chelsea area. Although it still owed outstanding fees under the Ilford franchise agreement C21 granted it the Chelsea franchise after being assured that it would pay all outstanding Ilford franchise fees. They signed a new franchise agreement for Chelsea, as well as a side letter confirming Iona’s commitment to pay the outstanding Ilford franchise fees.
Iona later failed to pay its Ilford franchise payments, and for this reason C21 purported to terminate the Chelsea franchise agreement. Iona sued for damages, claiming that C21 was not entitled to terminate the
Chelsea agreement. It argued that this was a separate contract, and that the side letter did not form part of it.
The judge agreed with Iona that the side letter didn’t form part of the Chelsea contract, and so C21 was not entitled to terminate the Chelsea franchise just because Iona had committed a material breach of the Ilford contract. C21 appealed.
What did the Court of Appeal say?
The Court of Appeal agreed with the first instance judge. They said that if you wanted to incorporate terms as contractual conditions the best way was to set them out in the contract.
Conclusion
The law is pretty clear, and if C21 had really wanted to ensure that a breach of one franchise agreement should entitle it to terminate another franchise agreement it should have set this out explicitly in the relevant agreement, or at least made it expressly clear in the side letter. The courts obviously didn’t feel inclined to make a big effort to interpret the law in favour of C21, as they had for Hyder in the Buchan v Hyder case; perhaps by saying that the clear agreed purpose of the side letter was to ensure that C21 could treat a material breach of the commitment set out in the side letter as a ground for terminating the new Chelsea franchise, otherwise what was the point of the side letter, and that C21 would not have entered into the Ilford franchise agreement otherwise. The result was not so obviously unfair. But also legally there was really less wriggle room in this case for the courts to have ruled this way even if they had wanted to.
Case: C21 London Estates Ltd v Maurice MacNeill Iona Ltd
