Who Breached the Contract? – part I

Beit Din Eretz Hemda - Gazit

Nissan 5783

Case: The plaintiff (=pl) owns a chain of eateries, who made a franchise agreement with the defendants (=def) to open a branch in a region in Israel. Def received, among other things, use of the chain’s trademarks and experience and pl’s commitment to rent a place to open the branch and receive a license. Pl and def were each to own 50% of the branch. Def were to pay 300,000 NIS under a payment plan, including 25,000 NIS to be paid directly and 100,000 NIS put into an escrow account, both soon after signing. The contract stated that any side who would breach the contract would have to pay 150,000 NIS. Def did not make the initial payments. Each side is suing based on the breach of contract clause, pl, because def did not pay, and def, because pl did not rent a place for the branch. [We will deal with various claims in installments.] Def used, both as a claim of pl’s alleged breach and as a defense of their alleged breach, the fact that the the franchise’s trademarks were not registered as pl asserted.

Ruling: In the contract’s "recitals," it says that the chain has registered trademarks, and all agree that while they have been operating branches for several years with recognizable logos and advertisements, none of these are registered, which def were unaware of. The Maraham Padowa (Shut 44) says that a contract with one objectionable provision does not invalidate the entire contract/agreement, and the Rama (Choshen Mishpat 51:6) rules this way. However, this is not so if other elements of the agreement depend upon that provision.
We need to determine whether def would have entered into the agreement had they known the chain had no registered trademarks, as, if not, the agreement was a mekach ta’ut. If there is a societal standard, we follow it (Rambam, Mechira 15:5). When it is less broadly clear, we follow the assumption of the buyer’s mindset (ibid. 16:5; Shulchan Aruch, CM 232:27).
From def’s lack of interest in finding out about the registered trademarks, it is likely that whether they were registered or not was not a major factor. Rather, the fact that the chain was a known entity was much more important. Customers who recognize the label do not care if it is registered. The chance that competitors will "steal" the trademarks is not great. The "blemish" is also one that can be easily remedied, as pl has recently applied to register the logos the chain uses, in which case we prefer fixing the lacking to undoing the agreement (see ibid. 5). While the Rama (ad loc.) limits this to blemishes that do not change the basic identity of the object (see also Netivot Hamishpat ad loc. 7), in this case, the franchise with its many plusses, is the same franchise even if its logos are not registered.
Therefore, the lack of registered trademarks does not void the sale, although this lack will have some impact to be discussed later.