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12 May 2015
A recent Court of Appeal case regarding the termination of a franchise agreement highlights the importance of ensuring that franchise agreements, as well as any updates or amendments to them, are properly documented.
Often franchisors will initially engage a franchise lawyer to draft their franchise agreement, but they can be tempted to deal themselves with any changes to or renewals of that agreement This can take the form of issuing a side letter to a franchisee or even re-drafting certain parts of the franchise agreement to reflect new commercial terms. In Thorney Park Golf v Myers Catering ( EWCA Civ 19), a contract between a franchisor and franchisee was drafted by laypeople and the franchisor had itself drafted the crucial clause relating to the term of the agreement. The dispute turned on how the provisions relating to the term and termination of the agreement should be interpreted. The parties had identified the initial term of three years as being required in order for the contract to be reasonable. The franchisee asserted that the agreement was for an "initial term" of three years, terminable thereafter by either party on four months' notice. The franchisor, however, argued that the contract was for a fixed term of three years but terminable nonetheless at any time by four months' notice within the initial three years.
The franchisor believed, based on its strict interpretation of the express wording of the relevant clauses, that it had a right to terminate after the agreement had been operating for a year. The judge in the initial hearing agreed with the franchisor. However, the Court of Appeal disagreed and upheld the franchisee's interpretation of the agreement. In reaching this decision, the court looked at:
The franchise agreement was for a bar and catering franchise for the provision by the franchisee of catering services at Thorney Park Golf Club premises from June 1 2009. By a letter dated June 9 2010 the franchisor sought to terminate the agreement. The franchisee contended that the termination was unlawful and, by a counterclaim, claimed damages for the alleged wrongful termination. The owners of the franchisee had provided catering services at the club from at least 2007, trading through different companies including Dial-a-Chef Limited (DAC), which had entered into a written agreement with the club dated December 21 2007 that was terminable by either party on three months' notice. DAC was paid a monthly management fee of £250 plus value added tax, but there was no provision for any initial specific term, fixed or otherwise.
The franchisor purchased the club in August 2008 and the new owners terminated the 2007 agreement and sent out a new draft form of franchise agreement on April 19 2009. This agreement was not signed, but both parties agreed that it represented the terms of the agreement between them. The agreement stated that it replaced any previous agreements that may have been in place for the provision of bar and catering services for the club. Clause 4 provided that the agreement was for a three-year term: "In order for this contract to be reasonable for both parties to develop and invest in a viable business development plan an initial term of three years (with the fee reviewed annually) must be agreed." The clause went on to state that, upon agreement to those terms, the franchisor would "allow and undertake" certain specific obligations, including the obligation to provide the facilities with suitably fitted kitchen and storage and to maintain such facilities.
Clause 6 dealt with termination. First, it provided that the franchisor could terminate the agreement immediately for gross misconduct on the part of the franchisee or similar situations. It went on to state: "Otherwise either party may terminate this Agreement without giving reason in writing giving four months' notice or any such period that is mutual to the parties." This drafting seems to suggest that the franchisor could indeed terminate the agreement within the three-year initial term, as it is clear that the termination for misconduct provision operated during this period. In addition, the word 'otherwise' suggests that termination (for no reason) on notice must also operate within this period. Counsel for the franchisee asserted, however, that this interpretation of Clause 6 would deprive Clause 4 of all practical application. At first instance, the county court rejected the franchisee's argument and ruled in favour of the franchisor. It held that the franchise agreement was for an initial term of three years, but that the ordinary meaning of the express terms of the agreement when read as a whole was that the parties were not locked into a three-year agreement and the franchisor could terminate immediately for misconduct or otherwise either party could terminate, without giving a reason, in writing on giving four months' notice.
The franchisee successfully appealed the county court's construction of the contract. In reaching its judgment on the construction of the agreement, the Court of Appeal took into account a wider range of factors than the county court judge. First, the Court of Appeal took into account the fact that the contract had been drafted by a layman to be read and understood by a layman, and interpreted the key clauses in accordance with how these would be understood by a layman. The court acknowledged that there was a lack of precision in the drafting but felt that significance should be attached to the reference "at the forefront of this contract" in Clause 4 to the initial term of three years as being required for the contract to be reasonable, to enable both parties to develop and invest in a viable development plan. It took the view that Clause 4 clearly provided that the terms of a development plan for three years should be agreed and that it was on this basis that the franchisor would undertake its obligations set out in the remainder of the clause. The court found that there was an element of conditionality to the contract dependent on agreement on the initial term and the idea that four months' immediate notice might have been given by either party on day two of the initial term seemed to be detrimental to such a provision.
The Court of Appeal also considered significant the fact that the reference to the initial term of three years was expressly inserted into the 2009 franchise agreement when the 2007 contract had simply provided for termination by either side on notice. It took the view that the parties would not have contemplated that this express change should have such little significance, as the franchisor's construction of the contract would imply. The franchisor's arguments in relation to the construction of its rights to terminate under Clause 6 were acknowledged, but the court determined that these arguments failed to acknowledge the forceful terms in which Clause 4 was expressed and the making of the franchisor's obligations contingent upon agreement to it, and the fact that the parties had clearly intended a change from the previous agreement.
In reaching its view on the construction of the relevant clauses, the Court of Appeal looked at the wider commercial context of what the parties wanted to achieve, which it determined to be a fixed initial term to make the new contract "reasonable", rather than a narrow focus on the construction of the termination clause.
This case clearly illustrates the dangers for a franchisor in seeking to alter its franchising arrangements without seeking professional advice. In lengthy common law franchise agreements, careful drafting and review is required to ensure that the insertion of a new clause does not contradict other standard provisions. If there is any conflict between various clauses of an agreement and the courts are left to decide the correct interpretation, then – following this case – they have given themselves a wide remit to consider factors outside the contract and a franchisor runs the risk of ending up with its agreement being interpreted to mean something completely different from that which it intended.
For further information on this topic please contact Shelley Nadler at Fieldfisher by telephone (+44 20 7861 4000) or email (firstname.lastname@example.org). The Fieldfisher website can be accessed at www.fieldfisher.com.
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