Two 2023 judgments highlighted the importance of drafting in franchise agreements and the courts’ reluctance to imply terms into the franchise relationship.
The judgments also emphasised the significance of renewal and its terms in the franchise relationship and the opportunity and risk this can present to both franchisor and franchisee, particularly where the commercial objectives of the franchisor and the franchisee may not be aligned. In most franchise agreements renewal rights are granted to a franchisee subject to certain conditions being fulfilled. One judgment found in favour of the franchisee, the other of the franchisor, but the lessons that can be learned are remarkably similar.
Winkworth Franchising Ltd v Nicholas Goble [2023] EWHC 2883 (Comm)
Mr Goble had five franchise agreements with Winkworth Franchising Limited (WFL) covering three franchised territories in central London and had been operating for approximately 20 years (being the term of the franchise agreements). He was entitled to renew the franchise agreements, but WFL were entitled to refuse renewal where Mr Goble was in material breach of any of his obligations.
The franchise agreements were in largely identical terms and all contained clauses requiring Mr Goble:
- To supply audited accounts for his franchised businesses by a certain deadline, and
- To provide information and documents relating to the accounts and operations of the franchised business on WFL’s request.
The latter clause also stated: “[t]his provision is fundamental to the terms and goes to the root of this agreement… and breach hereof shall constitute grounds for termination”.
WFL had made a number of requests for Mr Goble’s audited and unaudited accounts. However, in breach of the franchise agreements, he failed to provide them within the time period stipulated in the franchise agreements or by the extended deadlines that WFL set in its written requests.
Mr Goble served notice to renew the franchise agreements, but WFL served a counter notice refusing renewal and terminated the franchise agreements by written notice, both on the grounds of Mr Goble’s material breach for failing to provide the required information.
In the ensuing litigation, WFL applied for a declaration from the court that its objection to renewal was valid and therefore the franchise agreements had ended on the expiry date. Mr Goble claimed that WFL was deliberately seeking fault so that it could refuse renewal and either take over his franchised businesses or impose new terms more favourable to WFL. He also claimed that WFL was behaving unfairly given his successful operation of the franchise for the last 20 years. It appears that there had been a breakdown in the relationship between WFL and Mr Goble and trust had been eroded.
Mr Goble claimed that WFL could not validly refuse to renew without demonstrating that the failure to provide information amounted to a material breach and that this would depend on the reason for the information being provided. The obligation to provide the information had to be taken into account in the context of the performance of the franchise agreement as it could not be the intention of the parties that a failure to provide any financial information, even if minor, could amount to a material breach.
However, the judge disagreed and considered that the franchise agreements had come to an end. What was key was the wording of the relevant provision of the franchise agreement. The parties had already contractually and expressly agreed that the provision of the information in question was “fundamental” to the terms and failure to do so was a material breach and grounds for termination. The judge considered that Mr Goble was, in effect, seeking to insert an additional test of materiality of a breach when the parties had already agreed what constituted a material breach. In his view, “[i]t is not for the court to rewrite the bargain WFL and [Mr Goble] entered into in the franchise agreement” and Mr Goble’s failure to provide accounting information when sought by WGL constituted a material breach allowing WFL to terminate the franchise agreement. In addition, the judge made clear that the fact the relationship between the parties had broken down did not prevent him for reaching this conclusion.
The Burke Partnership v The Body Shop International Limited [2023] EWHC 2897 (Ch)
The Burke Partnership had in various guises been a franchisee of The Body Shop since it signed a franchise agreement for a franchised territory in Norwich in 1981. The parties subsequently entered into a franchise agreement for a franchised territory in Cambridge.
The original franchise agreements were drafted by The Body Shop’s solicitor and were for an initial term of five years. The Burke Partnership was entitled to “extend the term… on the same terms and conditions as are herein provided… for a further five years from the expiration of the term of this agreement” provided that it:
- Gave The Body Shop at least three months’ written notice before the expiry of the then current term, and
- Had complied with its obligations under the franchise agreement.
The franchise agreements had been renewed without any material amendments every five years until 2021 when The Body Shop refused to accept the Burke Partnership’s request to renew. After an unsuccessful period of negotiations where The Body Shop sought to impose a new form of franchise agreement on The Burke Partnership, the Body Shop served termination notices. The Body Shop explained in its refusal letters that:
- It considered that the franchise agreements were no longer “fit for purpose” as they did not reflect the development of the system of operating The Body Shop business and therefore could no longer serve as the contractual basis for trading under the brand,
- The Body Shop had hoped to be able to agree to amended terms but this was not possible and the difference in expectation between the parties as to the value of the franchised business meant little prospect of a buy back by The Body Shop, and
- As there was no contractual right for The Body Shop to serve notice to terminate except for breach and it cannot refuse renewal if notice is given the term of the franchise agreements as originally drafted was, in effect, indefinite, and was therefore subject to termination on reasonable notice.
The court was required to determine:
- Whether the wording of the renewal right in the franchise agreements provided for a single or repeated five year extensions, and
- Whether the franchise agreements are, either expressly or by implication, terminable on reasonable notice.
The Body Shop argued that the effect of repeated five year extensions without a contractual right for The Body Shop to refuse renewal or impose new terms created a perpetual contract, but commercial parties would not expect their contracts to run perpetually. It also claimed that the franchise agreements provided for only one five year extension and that properly reflected the factual matrix and commercial common sense. In contrast, The Burke Partnership’s formulation would produce an extreme and unexpected result in the form of a perpetual agreement.
The court rejected The Body Shop’s arguments finding that, provided The Burke Partnership complied with the necessary conditions, it was entitled to renew the franchise agreements on every occasion of their expiry. Because renewal was conditional on The Burke Partnership’s compliance with the franchise agreement, it was not a perpetual agreement as The Body Shop alleged. The court also held:
- The natural meaning of the words is clear - The Burke Partnership had the right to extend the term on each successive extension. It may have been commercially imprudent for The Body Shop to agree to this, but this in itself did not justify departing from the natural meaning of the words.
- Whilst a modern franchise agreement would not normally contain the right to extend at the end of each five year term, the drafting had to be considered in the context of the time in which it was prepared and the intention of the parties then. Franchising was in its infancy when the franchise agreements were signed and neither party had much experience of franchising and its operation. The Body Shop’s case that the agreements are now “hopelessly out of date” is not an argument that could be advanced at that time.
- The fact that The Body Shop considered the agreement was no longer “fit for purpose” did not absolve The Body Shop of complying with its obligations under an agreement that its own solicitor had drafted.
- No implied term was required as the agreements did not lack commercial or practical coherence or business efficacy and contained a provision entitling The Body Shop to amend the method of operation which The Burke partnership was contractually obliged to comply with.
Comment
The commercial background in both these decisions is one of conflicting aims between franchisor and franchisee. In The Burke Partnership, the franchisee wanted to renew on the existing terms and the franchisor to amend the terms or, failing that, to terminate. However, the franchisor could neither force amendments nor terminate and was effectively stuck with an unchangeable agreement that it had very little active ability to end. In Goble, the franchisee also wanted to renew on existing terms, and the franchisor wanted to terminate. In contrast to The Burke Partnership, however, the franchisee was unable to renew due to a technical failure to provide information on time and was therefore deprived of what may well have been a very successful estate agency. The lesson is the same despite the difference in outcome: the terms of the franchise agreement are key, the courts are reluctant to imply terms into a franchise agreement and when negotiating a franchise agreement, overlook renewal at your peril.
It is tempting for franchisors to assume that they have the power to impose changes at renewal or have the option to terminate, but this will depend on the drafting. As to franchisees, they will likely have little opportunity to negotiate renewal terms, so they must instead go into a franchise agreement understanding that it is not enough simply to run a successful franchise. A franchisor must focus on its entire network, and franchise agreements will often require strict compliance as a requirement of renewal. Accordingly, franchisees should not forget the importance of maintaining a good relationship with the franchisor throughout the term and abiding meticulously with every renewal condition to give the best chance of being able to renew on good terms and deprive the franchisor of a technical reason to refuse.
Nicola Broadhurst
Alasdair McDowell