When Is an Agreement Not an Agreement?

A major part of the law involves determining whether parties have formed an enforceable agreement and how that agreement should be enforced. A recent federal case underscores a core principle of forming agreements: the parties must agree to be bound by the agreement.

Two brothers, one living in California and the other in Argentina, wanted to open a cafe in the San Diego area. They contacted an Italian company operating a chain of cafes to negotiate a franchise. As part of the negotiations, a franchise agreement and a “hold harmless” agreement. The hold harmless agreement including a clause stating that the franchise agreement was not enforceable, but was signed so that the Argentinian brother could apply for an American visa. The hold harmless agreement also stated that a final franchise agreement would be signed at a later date. Complicating the situation were the failure of the parties to sign a final franchise agreement, the opening of a franchised cafe, and that the company’s representative later testified that the intent of the parties was to protect the company if the franchise agreement was used to violate American immigration law.

The cafe was unsuccessful. The brothers believed they were not given the promotion they were due, and sued the company in federal court for violations of a California franchise law. The company argued that the franchise agreement required all disputes to be arbitrated in Italy, with Italian law applying.

The law favors agreements to arbitrate, but the parties have to agree before a court will order arbitration. In this case, a federal Court of Appeals decided that, basically, the parties didn’t agree. What matters in determining if there was an agreement is what a third party looking at the situation would understand from the parties’ statements and actions. In this case, the most important fact was that the hold harmless agreement stated that the parties did not intend the franchise agreement to be binding. I’m not sure I would have agreed. It’s possible everyone effectively adopted the franchise agreement by continuing to act as if it was in effect.

This is a rare occurrence. In most situations, there won’t be a second agreement disavowing the fist. At most, there will be ambiguous statements whether there is an agreement. If you are concerned about whether you have formed an agreement, step back a minute and look at the situation as an outsider would. If you want to protect yourself, consider stating that you want to look at the paperwork in more detail and that there is no deal until you’re satisfied.

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