Incorrect Execution Could Prove Fatal

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...