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A recent UK judgment demonstrates the importance for franchisors to give prior consideration to exit strategies. This is to minimize the risk of being locked into long-term franchise agreements which are no longer commercially viable for business.
Franchise agreements are frequently used for medium to long-term arrangements, and as such, it is very common that they are allowed to roll-over without renegotiation. Yet, this judgment highlights the importance of active management of franchise agreements after they have been signed, as the courts cannot be relied upon to perfect the imbalance of a perpetual roll-over.
As the following decision was one of the UK High Court, it is likely to be persuasive in this jurisdiction, particularly in the current absence of similar caselaw in Ireland. We understand the decision to be under appeal.
On 16 November 2023, in The Burke Partnership -v- The Body Shop International Limited [2023] EWHC 2897 (Ch) the English High Court (the Court) delivered a judgment finding that cosmetic retailer, The Body Shop International Limited (The Body Shop) had invalidly terminated two franchise agreements with the Burke Partnership (the franchisee) which had been in place for some 40 years.
The Court held that neither agreement contained an express termination provision allowing termination without cause and as such, The Body Shop had no right to terminate for convenience on reasonable notice.
Background
In 1980 and 1981, The Body Shop and the franchisee entered into two franchise agreements to operate retail outlets in two small territories in Norfolk and Cambridge. Both agreements had an initial five-year term which was capable of being renewed by the franchisee provided that it met certain conditions. Both agreements were renewed by the franchisee multiple times over more than thirty-five years.
In 2020 and 2021, The Body Shop served notices to terminate both franchise agreements on what it stated to be a reasonable period of three years.
Submissions of the franchisor
The Body Shop argued that it had the right to terminate the agreements for convenience on reasonable notice. It contended that the renewal clause in the agreements did not apply for successive renewals, but rather it was a renewal right exercisable only once. As such, the agreements should not be read as being perpetual, which would imply a right to terminate for convenience on reasonable notice.
The Body Shop argued that it was implicit in the agreements that they only allowed for one extension and that after that point, the parties had been mistaken as to the legal position on the agreements.
Such a reading of the agreements would support the view that both parties had continued to perform their contracts beyond the fixed term, and it was now permissible to end the commercial relationship by serving a notice to terminate on reasonable notice.
Submissions of the franchisee
The franchisee argued that The Body Shop had no right to terminate the agreements on reasonable notice. It pointed to the fact that that there was no express right for The Body Shop to terminate for convenience.
It also stated that a breach of the conditions for renewal would give The Body Shop a right to terminate for cause, but as it had not breached these conditions, there was no justification under English law to imply a right to terminate on reasonable notice into the agreements.
The franchisee sought declarations that the notices to terminate issued by The Body Shop were invalid and the agreements remained in force.
Decision
The Court rejected The Body Shop’s argument that the agreements could not have been intended to run for perpetuity.
The Court ruled that this was not a contract which could be renewed at the franchisee’s option indefinitely, as the franchisee had to fulfil certain conditions as a pre-condition to The Body Shop being required to grant a renewal.
Furthermore, the Court stated that the agreements already provided explicitly for termination rights, which would arise from a failure on the part of the franchisee to meet the conditions, and to imply additional termination rights would cut across those explicit terms.
A clear unilateral renewal right for the franchisee which could not be refused by The Body Shop was an explicit term of the agreement, and an implied right to terminate for convenience on reasonable notice would contradict this explicit term. So far as the agreements continued to be performed and notices continued to be served, the franchisee could continue to operate as The Body Shop’s franchisee in both stores. In short, The Body Shop was held to the express terms which it had agreed in 1980 and 1981.
Takeaways for franchisors
1. Consider including an express right to terminate for convenience
The key takeaway from this decision is that the courts reject many of the arguments often run by franchisors who wish to escape long-term agreements where they do not have express rights to terminate for convenience.
It is already difficult to satisfy the courts of an existence of an implied right to terminate for convenience and this decision demonstrates that if a franchise agreement contains rights to terminate for other causes, then this bar is raised even higher.
To avoid this issue, franchisors should strongly consider including an express right to terminate for convenience.
2. Plan carefully for the renewal and roll-over of an agreement
Courts are likely to reject any argument founded on contract perpetuity.
It is very common that franchise agreements are allowed to roll-over. As such, franchisors will be expected to be aware of the importance of active management of their franchise agreements.
The Body Shop sought to raise the argument that the franchisee’s option for multiple renewals created a commercially disadvantageous position for them as franchisor, which was an argument the Court could not accept and dismissed. Arguments of that nature are likely to fail for a variety of reasons including that they have no bearing on whether an implied term is created as a matter of law.
A franchisor must plan in advance by explicitly including the number of times that a contract can be renewed, including any necessary conditions to be fulfilled by the franchisee on each renewal, as a court cannot be relied upon to amend any claimed contractual imbalance.
3. Consider exit strategies well in advance
Issues relating to future termination of a contract can be lower priority items for the parties to negotiate at the outset of a new venture. However, this judgment underlines why it is incumbent upon a franchisor to plan ahead and insist that its franchise agreements make clear and proper provision for the franchisor’s termination of the agreements.
For more information in relation to this topic, please contact Tom Casey, Partner, Rebecca Martin, Associate, Orla Clayton, Knowledge Consultant, or your usual A&L Goodbody Disputes and Investigations team contact.
Date published: 15 May 2024
