The principle of good faith in franchise agreements

The decision in Apollo Window Blinds Ltd v McNeil & Anor once again raises the principle of good faith in franchise agreements and also provides an insight into the High Court’s use of injunctions to enforce post-termination restrictions. We await publication of the full case transcript but in the meantime set out our initial thoughts on the case below. 

Case background 

The franchisor and franchisee entered into a franchise agreement in 2003 for one location. This agreement expired in 2008, but the relationship continued as if the agreement was still in place. Two further franchise agreements were later entered into for two additional locations. In 2011 the parties entered into three renewal franchise agreements; one in respect of each location. The 2011 agreements superseded all previous agreements.  

Each 2011 agreement contained a 5 year initial term and put the onus on the franchisee to provide the franchisor with notice to renew not more than 9 months and not less than 6 months before the relevant expiry date. The franchisee failed to serve notice to renew and on this basis the franchisor asserted that the agreements expired and therefore terminated in 2016. 

Issues 

Notwithstanding expiry, the franchisee continued to trade and the franchisor applied for an interim injunction to enforce the post-termination provisions in the franchise agreement. The franchisee objected arguing that (1) a renewal notice was not required  given the previous course of dealings between the parties in 2008 when the original agreement expired and the franchisee continued to trade despite no formal renewal agreement being entered into and no notice to renew being served, (2) there was an implied term that the franchisor should have reminded the franchisee about the notice period, and (3) the post-termination restrictive covenants were prohibited under competition law. 

Decision

Taking each of the franchisee’s arguments, the Court held that: 

1. The terms of the 2011 franchise agreement were clear and notice was required for renewal. The franchisee was therefore prevented from relying on any previous dealings to contravene the new agreement. Although the parties may have acted differently under a previous agreement, it did not mean there was an implied term to this effect in the new agreement.
2. It was impossible to imply a duty of good faith on the franchisor to remind the franchisee of the renewal notice period. It is reasonable for all parties to a contract to look at the agreement terms and the Court would not imply a term which required one party to inform the other of its contractual rights. This will come as a set-back to those arguing for an implied duty of good faith to be established in franchise agreements.
3. There was a disputed issue to be tried in respect of the enforceability of the post-termination restrictions. The franchisor argued that it needed to protect its know-how by enforcing the 12 month post-termination restriction; however the franchisee claimed not to have received know-how during its training. Non-compete restrictions are protectionist by nature but where there is nothing of substance to protect they may be found to be uncompetitive. The Court decided not to grant the application for an injunction because, on balance, if the franchisee was forced to cease trading but was ultimately successful at trial in its argument that the post-termination restrictions were unenforceable, the franchisee would suffer significantly and find it more difficult to recover (i.e. rebuild its business) than if no injunction was granted and the franchisor was ultimately successful. 

It was on this basis that the Court refused the application for an interim injunction to be granted and we wait to hear whether the case will continue to trial. 

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