As 2023 drew to a close, I reflected on the key developments in UK franchising case law in the year that was. There were four cases of note, three judgements awarded in favour of the franchisor, and one in favour of the franchisee.
By Gordon Drakes, Partner, Fieldfisher
Gordon Drakes
Interestingly all four cases are related to the topic of non-renewal and termination, and there are number of key takeaways for franchisors to bear in mind.
This article will not consider learnings from wider commercial case law, which is applicable to franchise systems, but sets out (in reverse chronological order) an overview of the cases and the key takeaways.
1. Burke Partnership (TBP) v The Body Shop International Ltd (Body Shop)
The Body Shop and TBP entered into two franchise agreements in 1981 and 1982 in respect of a retail store franchise for three Body Shop stores across the territories of Norwich and Cambridge (the ‘Agreements’). The Agreements were materially identical, and continued for a five term year, with a right to renew for a further five years. The Agreements were renewed over a thirty year plus period, by way of extension letters, which extended the term of the Agreements by five years.
Body Shop attempted to end this practice by serving a notice to terminate on three years’ notice, stating that the Agreements were not intended to run in perpetuity, and had become hopelessly out of date. TBP rejected the notices, stating that the Agreements are not perpetual as they can be determined, but the right to renew is ongoing, and Body Shop had no right to terminate on convenience. TBP sought a declaration from the court that the notices to terminate were invalid, and the Agreements should continue.
The court rejected Body Shop’s arguments for the following reasons:
- The Agreements already had express provisions relating to duration, renewal and termination, and the Agreements did not lack commercial or practical coherence in the absence of an implied term to terminate on reasonable notice.
- The term sought was not so obvious that it went without saying, meaning it could not be implied so easily.
- The argument that the terms were outdated, and so an implied right to terminate was needed, was not accepted as the Agreements and their extensions had been entered into willingly. Such a term would not have been contemplated at the time, and the commercial bargain struck in the early 80s endured to now.
Takeaways
- All franchisors should take the opportunity to review their renewal processes, criteria and contractual terms, to ensure there are no “ticking time bombs” woven into the fabric of their networks.
- Franchisors with “legacy contracts” should think carefully before engaging in a process of imposing a new franchise agreement or terminating on reasonable notice, if the underlying agreement does not allow for this.
- The English courts remain hesitant to imply terms. The court will only do so if the implied term does not interfere with the express terms, is required to correct a manifest error or is so obvious that it does without saying.
- In relation to interpretation, the courts will not consider commercial hindsight, but will look at the factual matrix as it existed at the time, and what would have been commercial common sense to the parties when they entered the agreement. Time is irrelevant – the commercial bargain as agreed over 40 years is still persuasive.
- A repeating right to request a renewal does not amount to a perpetual contract.
- Court declarations are a useful tool in litigation, particularly where damages would not be an adequate remedy, enabling parties to resolve uncertainty over major aspects of their claims before proceeding to full trial.
- Finally, don’t underestimate the power of a longstanding franchisee.
2. Winkworth Franchising Ltd v Goble
Winkworth and Goble entered into five 20-year franchise agreements (the ‘Agreements’) in respect of the sale and letting of property in London. Goble had a right under the Agreements to twice extend them by ten years. Winkworth could refuse to extend on specific grounds, including if Goble had breached any contractual obligation.
Goble was obliged to provide Winkworth with annual accounts for the year of 2020, by May 2021. Goble failed to produce the accounts following several requests from Winkworth. In 2022, Goble notified Winkworth that it wished to renew the Agreements. Winkworth issued a counter notice refusing the request for renewal, on the basis that Goble had failed to provide the required information.
Goble contested the validity of the counter notice, on the basis that:
- The breaches were not sufficiently material to justify the sanction of a refusal of an extension.
- The requests for information by Winkworth were insufficiently clear and that no rent receipts existed.
- Winkworth was estopped by convention as an understanding had arisen that there was no specific time frame for the provision of accounts.
- Winkworth was unfairly trying to find fault so that it could take over the franchises or enter into new agreements on different terms.
This was a summary judgement, and the court had to determine if Goble had a ‘realistic prospect of success’ at full trial. The court granted a declaration that Winkworth’s counter notice was valid.
Essentially, the renewal terms were clear and an additional requirement of materiality should not be imported in the Agreements. Winkworth’s requests for accounts had been ‘legitimate and sufficiently clear’ and Goble’s argument that a common assumption had arisen to estop Winkworth was not relevant to whether the terms of the franchise agreement had been breached.
Takeaways
- This case highlights the importance of having clearly drafted conditions for renewal.
- The courts are reluctant to import an additional requirement of materiality if a franchisee is in breach of those conditions.
- It is important to follow up on breaches. In this case, that Winkworth has issued breach notices for the late submission of accounts easily overcame the argument for estoppel by convention.
3. London Business House Ltd v Pitman Training Ltd
London Business House Limited (LBH) entered into a franchise agreement in 2015 with Pitman Training Limited (Pitman) to provide career focussed training courses and qualifications for individuals looking to develop their professional skills.
LBH terminated the franchise agreement in 2017, blaming the failure of the franchise on Pitman’s supply of “white labelled” course materials to another course provider, which was operating in the same territory. LBH claimed Pitman’s activity breached an implied term of exclusivity, and that Pitman misrepresented to LBH in pre-contractual negotiations by stating LBH would enjoy an exclusive territory from which to trade the Pitman brand.
The court held that Pitman’s actions had not breached any contractual exclusivity, and LBH, which was advocating as a litigant in person without legal representation, had failed to produce sufficient evidence of pre-contractual misrepresentation, which could overcome the entire agreement and non-reliance clauses in the franchise agreement.
Takeaways
- Despite finding against LBH, the court was persuaded by the argument put forward by LBH that there was an exclusive aspect to the grant of the Pitman franchise, despite an absence of the word “exclusive” in the grant of rights. Language used elsewhere in the franchise agreement certainly created an impression of exclusivity over the use of the brand and system in a dedicated area.
- Franchisors should review their grant of rights carefully (typically non-exclusive, sole or exclusive, or perhaps a franchisee right of first refusal), and ensure this is consistent throughout the franchise agreement, and reflected in all pre-contractual discussions and documents.
- If franchisors overlay geographical areas with “channels”, they need to take care over how their franchise agreements regulate exclusivity. The same applies if franchisors themselves sell goods or services into the same areas, perhaps via online sales, or in this case, white labelled goods or services.
4. Hunters Franchising Ltd v Brybond Ltd
Brybond, the master franchisee, had entered into a renewal regional master franchise agreement (MFA) in 2014 for the Hunters estate agency. The MFA included a development schedule requiring Brybond to meet certain development targets (appointing approved sub-franchisees) within its allocated territory, failing which Hunters could withdraw exclusivity.
When the time came for renewal of the MFA, it was not disputed that Brybond had failed to comply with the development targets.
However, Brybond argued in defence of the breach that Hunters did not act in good faith because it allowed a position to develop in which the only question Hunters asked or answered, when deciding whether to approve each of Brybond’s proposals for sub-franchisees, was whether an existing franchisee (who had reached a settlement with Hunters which affected the part of allocated territory in the MFA), would suffer under that proposal and Hunters did not allow itself to either measure that disadvantage objectively or to contrast it with the disadvantage to anyone else with whom it had legal relations by the rejection of that proposal.
In consequence, it was argued, Hunters did not use its power (or veto) to reject (or approve) proposals, for the purpose for which that power was granted, but, rather, used it for an ulterior purpose; either to favour the other franchisee or to put Brybond in breach of the MFA.
Counsel for Brybond abandoned the contention that there was a broader, more free-standing, implied duty of good faith in the 2014 MFA, but instead asked the judge to consider if Hunters had breached a Braganza implied term when exercising its contractual discretion to approve or disapprove a development proposal.
The court held there was no breach of the Braganza duty (an implied obligation in the absence of clear language to the contrary) either on grounds of irrationality or for an ulterior purpose. Hunters had a consistent policy relating to exclusivity and allocation of development opportunities, it did consider the impact of its decisions on the relevant franchisees and it dealt openly with Brybond, reminding Brybond of this policy, considering other proposals with an open mind, and suggested refinements to the proposals in question.
Takeaways
- The courts are unwilling to imply general duties of good faith, unless there is a clear contractual gap to address.
- The Braganza duty differs from a general implied duty of good faith and applies only to where one party is able to exercise discretion on a matter that affects both parties with differing interests.
- Franchisors should develop criteria for all matters requiring contractual consent (such as site/candidate approval, contract renewal, or approving a sale of business).
gordon.drakes@fieldfisher.com
www.fieldfisher.com
Posted: 4th March, 2024