In the recent case of Hunters Franchising Ltd v Brybond Ltd and Stephen Paul Berson the court considered whether, in the context of a master regional development agreement, (i) the franchisor (Hunters Franchising Ltd) had exercised its contractual discretion irrationally and/or for an improper purpose (in breach of an implied term often called the Braganza principle) when approving or disapproving developmental proposals put forward by its regional master franchisee (Brybond Ltd and Mr Berson) and (ii) whether an express mention of a certain remedy excluded all other remedies that would otherwise be available by operation of law.
On the facts, the court held that the Braganza duty had not been breached as Hunters Franchising Ltd (Hunters) had considered the impact of its decision on both parties with an open mind, had consistent policies in place and used commercial reasons to justify the outcome. The court also reiterated its consistent approach that an express provision confirming one type of remedy should not be construed as meaning all other remedies are excluded unless this is clearly stated.
Background
Brybond Ltd and Mr Berson (Brybond) and Hunters entered into a renewal master regional development agreement (the agreement) in 2014. The agreement (as is typical of master franchisee and area development agreements) included a development schedule which required Brybond to recruit an agreed number of franchisees in the allocated territory to achieve the development targets. Failure to meet the development targets entitled Hunters to withdraw the exclusivity granted to Brybond in its territory. The agreement required Brybond to propose potential franchisees which, at Hunters' discretion, could be approved or disapproved.
When the time came for the agreement to be renewed, both parties accepted that the development targets had not been met. However Brybond argued that Hunters had not acted in good faith when approving or disapproving potential franchisees, as the only question asked or answered when deciding on the suitability of the potential franchisee was whether an existing franchisee in the given territory would suffer as a result of the proposal. It was therefore argued that the power to reject or accept a proposal was used for an ulterior purpose to either force Brybond into a position where it was in breach of the agreement or to favour the existing franchisee. This broad line of argument, however, was abandoned during the case and counsel for Brybond refocused on whether an implied Braganza duty (rather than a general duty of good faith) had been breached when Hunters exercised its contractual discretion to approve or disapprove a proposed franchisee. The question was restructured as follows: was any rejection by Hunters of any of the proposed franchisees irrational or for an ulterior purpose? It was accepted by both parties that the Braganza duty did apply to this set of facts.
Decision
1. Braganza duty
The court affirmed that in the absence of an express contractual exclusion where a party has a contractual discretion the exercise of which may adversely affect the interests of the other party then it will usually be implicit that such discretion must be exercised honestly, rationally and for the purpose for which it was conferred and such discretion must not be exercised capriciously or unreasonably. This is known as the Braganza duty. It was held that this duty had not been breached by Hunters in refusing proposed franchisees on either irrationality or ulterior purpose grounds. This was due to the fact Hunters had clear polices in place which it applied consistently regarding the allocation of exclusive franchise territories where this may affect existing franchisees and had considered the impact of its decisions on the current and proposed franchisees. Further, Hunters had reminded Brybond of its policy and considered each proposal with an open mind. In some circumstances Hunters had offered alterative solutions to the proposal. When Hunters disapproved of a proposal, it did so with the commercial justification of reducing conflict between the franchisees and in pursuit of the common purpose of developing the Hunters brand in the given jurisdiction.
This decision confirms the existing authority that the courts are reluctant to imply a general duty of good faith. Whilst the court was not required to consider whether a general duty of good faith existed, the judge did consider whether there was a distinction between a general duty of good faith and the Braganza principle.
A Braganza duty is only applicable where one party can exercise their discretion on a matter that affects both parties with differing interests. Therefore, franchisors should be aware and take care to develop criteria for matters which require consent even though compliance with the Braganza duty is a high bar. A further note to franchisors following this case is to fully document the decision-making process when exercising such discretion, as this will make it easier to disprove potential claims that decisions were made dishonestly, irrationally and/or for an improper purpose.
2. Remedies
The court also considered whether the provision of an express contractual remedy for a failure by Brybond to meet the development targets (being the removal of exclusivity) removed the possibility of Hunters being entitled to also claim damages for the breach. The court helpfully restated the rules on contractual interpretation and held that as the master franchise agreement did not expressly exclude a damages remedy for a breach of the development targets, nor was this discussed when the parties were drafting the agreement, Hunters was entitled to claim damages. If a party intended to exclude a specific remedy for a breach (to which it would be entitled by law) then they should do so using clear and express words. The fact the master franchise agreement was drafted by a professional was also taken into consideration highlighting the importance of this, as agreements drafted by skilled professionals are likely to be interpreted primarily by the text that is written.
This ruling reiterates the courts' existing position that an express provision confirming one type of remedy should not be construed as meaning all other remedies are excluded. If the parties intend to exclude all other remedies from being claimed, then express language within the agreement should be used.
This underpins the importance of the legal drafting and the court will not reject the natural meaning of words simply because it appears to be a bad bargain for one of the parties. This highlights the need to ensure franchise agreements are fit for purpose and for franchisees to seek advice on the contractual terms before signing.
Nicola Broadhurst
Sophie Imber