Recent case highlights once more the pitfalls of termination of franchise agreements

A recent High Court decision highlights, yet again, the difficulties a franchisor will confront in seeking to robustly enforce termination provisions when there is a genuine dispute about misrepresentation and breach of the Fair Trading Act against the franchisor.

Many franchisors believe the usual disclaimers and acknowledgements in their franchise agreements will be enough to protect them from such claims, however the Courts have shown time and again that when it comes to genuine misrepresentation claims, the Courts will not strike these out at an early point but allow them to proceed to trial.

A franchisor seeking to enforce their termination provisions must be prepared to buckle down for an expensive fight, unlikely to produce any real winners. As all Court lawyers practising in this field will know, even if such claims by franchisees are ultimately unsuccessful, franchisees generally exhaust much of their resources in the process of litigation, meaning there is often little there at the end of a claim to meet the costs of the successful franchisor.

In a recent decision involving a Rockgas franchise, the franchisee and its guarantor signed the usual acknowledgments that they had sought independent legal and accounting advice and that they were not entering into the franchise agreement in reliance on any representations or warranties made by Rockgas. Many franchisors believe such acknowledgments will protect them from a subsequent claim but of course many dispute lawyers know that is not the case.

The agreement itself (dated April 2012) contained the usual provisions for termination in the event of default for non-payment of fees.

The franchise business had been an existing business which had not been performing well when the franchise was granted to the franchisee. The franchisee alleged that there was to be a collaborative approach taken to restoring the business to profitability, with the franchisor and franchisee agreeing to work together. The franchisee alleged that, as part of this collaborative approach, Rockgas agreed that it would not terminate the agreement, so long as the business was showing signs of progress.

Over the course of a year, the profitability of the business did wax and wane somewhat although, arguably, there were good signs of progress, particularly during the early to mid-stages of 2013. Nevertheless the franchisor seemed to have unilaterally decided to depart from its “collaborative” approach and issued a termination notice in July 2013.

As you would expect, Rockgas denied all the allegations of misrepresentation and said it could not be expected to indefinitely grant a franchise to a franchisee where there was ongoing breach, and in circumstances where the franchisor was effectively prevented from termination.

The franchisee, presumably in the expectation it was about to be sued, took the bull by the horns and commenced its own claim against the franchisor for misreprestation. This left the franchisor facing a substantial claim for damages as a result of a wrongful termination.

The case came before the Court by way of a summary judgment application brought by the franchisor to strike out the claim. The Court has power, in limited circumstances, to strike out such claims where there is no prospect of success. Rockgas relied on the written acknowledgements and disclaimers contained in its franchise agreement.

All the usual sorts of affidavits one tends to see in these types of applications went before the Court, containing contrasting versions of events about the alleged misrepresentations and highlighting disputes of facts bearing on the merits of the case.

In summary judgment applications, the Court shies away from making rulings on factual disputes. This is because the witnesses do not give oral evidence and are not cross-examined. That only happens at a trial.

In what I thought was a very predictable outcome, the Court refused to strike out the franchisee’s claim. This was because the disputes of fact needed to be the subject of cross-examination (at a trial) and the dispute was not appropriate for summary judgment. The Court was also sympathetic to the fact it was clear Rockgas knew from the very outset the business was unprofitable, that it had the means to regularly monitor progress, and that the termination notice ultimately came with very little warning.

The outcome of the case may have come as some surprise to the franchisor, who no doubt believed it was entitled to rely on the robust wording of its franchise agreement. The case however highlights the difficulty franchisors confront when they seek to fall back on their franchise agreements, especially where there has been an expectation created in the mind of the franchisee that termination will not occur, so long as the franchisee is progressing and diligently working to improve the business. It is nothing short of “legally messy”, when franchisors seek to exercise their “rights” to terminate in circumstances when it is clear a genuine dispute has been raised.

There is no mention in the judgment as to whether the parties have explored mediation or even whether there is a mediation clause in the franchise agreement, but one can’t help but wonder whether the mediation pathway might have produced a better outcome for the franchisor. It now faces a case taking up to a further year plus to resolve through the Courts, with a potentially uncertain outcome, and at considerable expense which it is unlikely to fully recover from the franchisee even if it wins.

(October 2014)

The Copyright owner of this article is Deirdre Watson. Please ask my permission if you wish to reproduce or use this article.