The franchise case begins with a quote of movie mogul, Samuel Goldwyn, “A verbal contract isn’t worth the paper its written on.” Goldwyn’s truism regarding contract law is remembered in the case of Van Bortel v. Ford Motor Company, 2022 WL 322847 (W.D. NY Aug. 10, 2022).

District Court Judge David G. Larimer was called upon to decide offer and acceptance occurred, whether consideration was present and whether an enforceable contract was alleged in the amended complaint. The Court explained, “this case demonstrates that oral conversations containing vague promises that are never committed to writing are ill-suited means of forming enforceable contracts. As a result, the motion under Fed. R. Civ. P. 12(b)(6), which assumes all facts pleaded are true, was granted and the amended complaint dismissed for failure to state a claim upon which relief can be granted.

The alleged oral contract, or in this case, contracts, arise from a third party sale of a Ford dealership. Plaintiffs multiple Ford car dealerships based in East Rochester, NY. Henderson Ford, a dealership in Webster, NY, was coming up for sale. Ford allegedly told plaintiffs that it would exercise its contractual right of first refusal (“ROFR”) on the anticipated Purchase and Sale Agreement (“PSA”) and assign the PSA to plaintiffs. But Ford never did that and the Henderson Ford dealership was sold to another dealer. Plaintiffs brought a two count complaint, the first for breach of the oral contract to assign the PSA to plaintiffs, and the second for violation of the New York State Human Rights Law (“HRL”) (which was also dismissed by the Court).

Before taking a deep dive into this contract case, we should discuss the effect of a ROFR in franchise transactions. Where regulated by state law, as in New York, franchisors must approve the transfer/sale of existing franchises to qualified franchisees. The ROFR allows the franchisor to satisfy the transferring franchisee’s sale requirement, but control to whom the franchise is sold. The ROFR can be exercised by the franchisor and then can be assigned to the franchisee of the franchisor’s choosing, allowing the franchisor to sculpt the growth of the franchise system with franchisees of its choosing. The ROFR can be unpopular with the existing franchisees who are seeking to expand if the franchisor chooses one franchisee over another with a plum location. The existence of a ROFR can also chill franchise resales if the franchisor exercises the ROFR so often that existing franchisees don’t bother to offer to buy franchises as they come up for sale, only to have the franchisor steer the deal to a more favorable franchisee.

Ford has a right to approve or disapprove any sale, but the state statute in NY controls that discretion. Ford also has a contractual right to exercise it ROFR at its discretion, and assign that ROFR (perhaps even at a premium). By assigning the ROFR, Ford can avoid being in the chain of title. In this case, allegedly a Ford representative told plaintiffs that there was an interested buyer in Henderson Ford, a PSA was being prepared, and if plaintiffs wanted the location, Ford would exercise its ROFR and assign the PSA to plaintiffs. At Ford’s request, plaintiffs entered into a confidentiality letter which Ford required of all prospective assignees of Ford’s ROFR. The letter also stated, “Neither this letter nor any efforts you may or may not make to pursue such a transaction shall not, [sic] in any way, obligate either party to the above-mentioned transaction.” Plaintiffs signed the letter.

But Ford thereafter decided not to approve the PSA and therefore the ROFR was not exercised. Plaintiffs reiterated that if Henderson Ford were again on the market and a PSA signed, that plaintiffs would desire to take an assignment of the PSA. Ford allegedly agreed, however, another PSA was prepared, signed and approved by Ford, and Ford advised plaintiffs that it did not intend to exercise the ROFR. The Henderson location was sold to a third party.

The Court addressed two alleged breaches of contract. The first was the failure after signing the confidentiality letter to exercise the ROFR and assign the PSA. The second was the failure the second time when a new PSA was prepared, to exercise and assign the ROFR. In both cases, the Court concluded that the two contracts were unenforceable for failure of consideration.

The Court concluded that an offer and acceptance had occurred, and that the consideration was “a bargained for exchange of promises or performance.” The Court concluded that consideration was absent because plaintiffs did not allege what they promised to do in return if the ROFR was exercised and assigned.

Plaintiffs contended that the obligations under the confidentiality letter were sufficient consideration but the Court disagreed, citing disclaimer language in the letter that the proposed “transaction shall not, [sic] in any way, obligate either party to the above mentioned transaction. The Court acknowledged that it should not review the adequacy of the consideration, but rather only whether plaintiffs exchanged something of real value by agreeing to take action or forbear in some conduct. The Court concluded that plaintiffs had not done so.

The Court cited New York law regarding the factors necessary to enforce an oral contract. Citing a Second Circuit case, the Court found that the hallmarks of an oral contract were missing. Not all of the details had been agreed upon to constitute a meeting of the minds. Nor had the parties stated that they intended to be bound to a transaction of this significance without the necessity of reducing it to writing.

Ford obviously wanted a different or stronger franchisee to take over. It is unclear what damages plaintiffs would have been entitled to receive if they prevailed. More likely, the deal was not detailed enough for the remedy of specific performance. If a franchisee wants an enforceable deal like this, then the franchisee should offer to purchase the ROFR in writing and pay even for a nominal amount for the exercise of the ROFR, in order to insure the transaction will occur. As Mr. Goldwyn realized, enforceable deals need to be documented and not left to businesspeople merely shaking hands.

A version of this post originally appeared in and is reprinted with permission from the August 19, 2022 issue of The Legal Intelligencer. ©2022 ALM Media Properties, LLC. Further duplication without permission is prohibited.  All rights reserved.