In three recent English Court cases, the right to renew a franchise agreement emerges as a nuanced interplay between franchisor discretion, franchisee expectations, and contractual conditions. The right to renew a franchise agreement is a central facet of the relationship between franchisor and franchisee. This article will explore the diverging perspectives the courts took to consider whether the right to renew is an absolute entitlement, a conditional right, or rests solely on the franchisor’s discretion. The cases are Winkworth Franchising Ltd v Goble, Hunters Franchising Ltd v Brybond Ltd, and Burke Partnership v Body Shop International Ltd.

Most franchise agreements contain a right to renew in favour of the franchisee. That right is usually subject to conditions. Some conditions are straightforward Yes/ No answers; e.g. that the franchisee is not in breach. Some conditions are subject to a discretion in favour of the franchisor; e.g. whether the franchisee has performed its obligations to the franchisor’s satisfaction. Another may be a combination of both; e.g. that the franchisee signs the then current form of franchise agreement. The signing or not is a simple Yes/ no answer but whether the franchisor was entitled to amend the franchise agreement in the way it did may be the exercise of a discretion or power, and the question is then whether the franchisor has gone too far in its amendments.

Where a franchisor has a discretion and its options are not a binary Yes or No then a court is likely to imply a duty to exercise that discretion in a way that is not arbitrary, irrational, capricious or dishonest. That is known as a ‘Braganza’ discretion named after the case that clarified the law.

In Winkworth v Goble, the court underscored the franchisor’s ability to terminate or refuse renewal based on material breaches. While the franchise agreement did provide for material breach as a valid reason not to renew the contract, the debate was whether the breaches were in fact ‘material’ ones and whether the franchisor acted reasonably in taking this view.

The facts in Winkworth v Globe are that the franchisee was successfully operating several of the franchisor’s franchises for 20 years. In this case, the alleged breaches were regarding the franchisee’s contractual obligations to provide the annual accounts and invoices evidencing that rent had been paid for all the franchises, within a specified period. Despite numerous requests from the franchisor, the franchisee failed to provide them at all. When came the time for renewal, the franchisor issued a counter notice advising Mr Goble that he had been in breach of his obligations under the franchise agreements.

Following the counter notice, Mr Goble provided the required documentation. However, the franchisor took the view that the breaches were material ones and consequently issued a letter of termination to the franchisee a couple of days before the expiry date. Mr Goble claimed that the franchisor’s obstructive behaviour was due to an ulterior motive (that of granting a new agreement on more favourable terms to the franchisor) and that, given the draconian consequences of not complying with one of the conditions under the agreement, this did not reflect on the long-lasting relationship between them. It is worth noting that, while the franchisor could validly request to see a copy of the accounts and invoices under the agreement, the franchisee sought further clarification on why this request was made, given that it was a difficult time for the business due to the COVID-19 pandemic. The franchisor was successful and obtained summary judgment (without a full trial). The court was of the view that the breaches were material and the franchisor was justified in terminating and refusing to renew.

Renewal was also under the spotlight in Hunters v Brybond, but in the context of franchisor discretion rather than contractual right. In this case, the franchisor is an estate agency which had developed a franchise model for its business after the 2008 financial crash and had appointed a master franchisee with the understanding that they should meet certain development obligations. These are not uncommon with regional franchisees as they attempt to enlarge the franchisee network by ensuring that new franchises open on a regular basis in a given territory.

The agreement between Brybond and Hunters required Brybond to suggest potential franchisees, subject to approval by Hunters. When renewal time came, both parties acknowledged that development targets were not met. Brybond claimed Hunters did not act in good faith when approving or disapproving franchisees, as their decisions seemed focused solely on whether existing franchisees in a given area would be affected negatively. This, Brybond argued, was to either push Brybond into breach or favour existing franchisees. Hunters explained they had policies and adhered to them when considering applications from prospective franchisees.

Here, the court applied the Braganza principle to assess the franchisor’s approval or disapproval of the prospective franchisees. As discussed above the principle arises when a discretion or power is given to a party and provides limits to the exercise of that discretion, namely that it should be exercised honestly, rationally and for the purpose for which it was conferred. The second limb of the principle also specifies that an express mention of a remedy does not exclude all other remedies that would otherwise be available by law.

The court found that Hunters did not breach a Braganza duty in rejecting proposed franchisees, as they had clear and consistent policies regarding exclusive territories and considered the impact of their decisions on current and proposed franchisees. Additionally, the court clarified that providing a contractual remedy for Brybond’s failure to meet development targets (ie: non-renewal) did not prevent Hunters from also claiming damages for the breach.

The case had been run solely on an argument about an implied duty of good faith. At trial Brybond changed tack and put it on a Braganza basis instead. The trial judge entertained the argument, only to dismiss it on the facts, but it is fair to say the application of the principle was not as fully explored as if it had been put on that basis from the start.

Finally, the case of Burke Partnership v Body Shop International Ltd dealt with the validity of terminating franchise agreements by the franchisor. The court ruled against the franchisor’s attempt to terminate the agreements on reasonable notice, as there was no contractual right to do so for convenience and Body Shop’s argument for termination due to outdated agreements was unsuccessful.

Body Shop argued that the agreements were not intended to last indefinitely and sought to terminate them on three years’ notice. However, Burke Partnership (TBP) rejected this, citing the absence of an express termination right for Body Shop and asserting that TBP was not in breach. The franchisor contended that the absence of a termination right was due to the agreements’ intended duration.

The court emphasised interpreting agreements based on the factual context and commercial sense at the time of formation, disregarding hindsight. It highlighted the importance of accurate record-keeping and clarified that a repeating right to request renewal does not make a contract perpetual although well-drafted franchise agreements generally do define maximum terms and renewal conditions.

Although not an issue in the three cases it is my view that a renewal condition being that the franchisee signs the then current franchise agreement may also trigger a Braganza analysis where the new agreement is different to the existing one.

Franchisors have good reason to update their agreements – changes in law, in the market, in technology etc can and probably will result in a need to update the template agreement. Sometimes franchisors introduce new fees as they expand, eg a national marketing fee, or a technology fee to support web development or new software that fulfils an important function.

But what of the franchisor who wants to increase a management services fee, or introduce minimum performance with penalties for failure to achieve it such as loss of exclusivity, or even to renew but for a smaller territory only. That is the exercise of a discretion or power. It if turns a profitable franchisee business into a loss-making one, or erodes the capital resale value of the franchisee’s business, or creates KPIs that are extremely difficult to achieve, then this may be a breach of a Braganza discretion (and may also be a derogation from the grant of rights the franchisee has to operate and renew). There will likely be cases in the future that have to assess the extent to which a particular franchisor sought to amend its template renewal agreement.

The three reported cases underscore the significance of precise legal drafting, as the court will not disregard the ordinary meaning of terms just because they seem disadvantageous to one party.

The rulings in these cases highlight the need for written policies governing renewal considerations and potentially incorporating them in the Manual so that franchisees understand the criteria that will be applied. Franchisors should retain a record of renewal decisions and the reasons for approving or disapproving them should a franchisee challenge a decision. The fact that a franchisor can demonstrate it has a policy and applies it evenly to all franchisees will help defeat a challenge.

Case law is likely to develop further in this arena as franchisees’ lawyers argue the Braganza duty in ever more situations. It cannot apply to a decision to terminate a franchise agreement. It is very likely to apply to aspects of a renewal decision. It undoubtedly applies to other rights and powers too, but we’ll leave that to another article.