A federal Appeals Court has held that an offer to extend a franchisee’s buyback period lacked consideration required to form an enforceable contract and, instead, was an unenforceable gratuitous promise by the franchisor.
The IRS revoked the Electronic Filing Identification Number (“EFIN”) of a franchisee who owned nine tax preparation franchises. The IRS acted due to improper business practices of the franchisee. As an alternative to terminating the franchise, the franchisor and franchisee entered into a purchase and sale agreement (“PSA”) in January, 2016. The PSA gave the franchisee until May 2016 to obtain a valid EFIN and buyback the nine franchised locations from the franchisor.
In April, the franchisor, by phone, offered to extend the May buyback deadline until December 31. The franchisee confirmed this by email. In the meantime, however, the relationship between the franchisor and franchisee deteriorated due to the franchisee’s failure to assign leases for the franchised locations to the franchisor, as required under the PSA.
A lower court held the franchisor liable for breaching the PSA. The court found that the franchisor’s promise to extend the deadline was an enforceable contract. But, on appeal, the franchisor successfully argued that the offer to extend the deadline was unenforceable because the obligations the franchisee agreed to after May were either part of the original PSA or promises that were not separately bargained for with additional consideration from the franchisee.
While valid consideration can consist of even a modest promise, the Court of Appeals held that the transfer of leases, payment of utilities and rent and the franchisee’s efforts to obtain a valid EFIN did not equate to consideration. This was because the franchisee was not asked to do any of these things in exchange for a deadline extension.
Without there being “consideration,” the franchisor’s promise was just a gratuitous promise, not an enforceable contract. While damages could be recovered for the franchisor’s breach of the PSA, the franchisee was not entitled to damages for the franchisor’s refusal to sell back the franchisee’s former franchised businesses.
Franchisees should consult legal counsel when entering into agreements with a franchisor and before accepting terms made outside of an enforceable contract to reduce the risk that the changed terms will be found to lack adequate consideration, rendering them unenforceable in court.
JTH Tax, Inc. V. Aime, 4th Cir. (August 8, 2018)
