Article by Marshall Bromwich and Fleur Shaw-Jones
A recent UK decision highlights the importance of finalising and executing documents in the correct manner to ensure the documents cannot later be deemed to be invalid. This is particularly important in the context of executing franchise agreements where given the formal process to be complied with under the Franchising Code.
In R (on the application of Mercury Tax Group and Another) v HMRC, Mercury operated a tax avoidance scheme. To implement the scheme, clients were required to execute three documents - a trust deed, an options agreement and a sale and purchase agreement. Mercury requested clients execute these documents when they were in draft form. The documents were subsequently amended, however the final versions were not executed by the clients. Rather, Mercury took the signed execution pages from the draft versions and stapled them to the final versions.
The UK tax office objected to the implication of the tax avoidance scheme and used the manner in which the documents were executed as a ground for arguing that the documents were invalid and therefore the scheme had been unlawfully implemented.
The court noted that where execution of a document is critical, the document to be signed should exist as a discrete, physical entity. On this basis, the court held the documents were not legitimately executed, as they had not been executed in their final form.
This decision is particularly relevant to the franchisee sign-up process where there is a precise order in which documents must be signed to comply with the procedures under the Franchising Code of Conduct. An effective sign-up process is critical for franchisors to ensure that the franchise agreements in place throughout the system are valid given that these agreements are a valuable and important asset.
For franchisors that handle the sign-up process internally, the following lessons from the case should be adhered to in practice:
- Do not get draft documents signed and then attach these signatures to the final version
- Provide all executing parties with a complete copy of the final version of the document for execution rather than just the execution page
- Do not use signatures from a previous version of a document if changes have been made to the document
- If documents are to be executed in counterparts, ensure that the document provides for this and the complete copies are executed by each party.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.