When is a franchisee disqualified from a renewal term?
Mr Whippy Pty Ltd v Oceanwalk Pty Ltd [2008] NSWCA 8
The case
Mr Whippy franchised the retailing of soft serve ice cream and related products. Oceanwalk was the master franchisee for a territory in south-eastern Queensland. The master franchise expired on 20 May 2003 subject to an option to renew for a further 10 years. Oceanwalk exercised the option to renew within the time frame set by the Master Franchise Agreement but Mr Whippy refused to recognise the renewal on the grounds that the Master Franchisee had not complied fully with the Master Franchise Agreement. Mr Whippy did not advise Master Franchisee of refusal until it sent a letter dated the day before expiry, which Oceanwalk received the day after expiry, advising that renewal was denied.
In the initial proceedings the District Court granted to Oceanwalk damages for breach of contract for refusing to renew the master franchise. Mr Whippy appealed, arguing that the Judge erred by failing to recognise that the option to renew had not been validly exercised because Oceanwalk was in breach of the master franchise agreement. Mr Whippy argued that there was no right to renew as Oceanview did not comply with the master franchise agreement, particularly the obligations to use best endeavours to open outlets and obligations to provide reports.
Renewal clause
The renewal clause provided:
“Subject to the provisions of this clause, the Agent shall have an option exercisable only by written notice delivered to the Company on or before [specified date] to renew this Agreement for the Renewal Term … if, and only if the Agent has been, throughout the Term and at the expiration of the Term still is, in full compliance with this Agreement and all other agreements between the Company and the Agent …”.
Specific obligations
The relevant subclauses of clause 4.1 of the Master Franchise Agreement provided:
“The Agent undertakes and agrees with the Company that he will at all times during the continuance in force of this Agreement observe and perform the terms and conditions of this Agreement and in particular:-
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Will use his best endeavours to locate retail outlets within the Territory which shall be available for lease and which he considers suitable for the conduct of the Business;
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Will in respect of any retail outlet the subject of a Franchise Agreement initially entered into by an approved nominee during the Term:-
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furnish written reports to the Company from time to time and in any event at intervals of not less than thirty (30) days specifying whether the Business is being conducted from the retail outlet in accordance with the Operations Manual …..”
Failure to use reasonable endeavours to open outlets
Mr Whippy argued that the master franchisee’s failure to use reasonable endeavours to open retail outlets was evidenced by their failure to actually open any outlets between 1998 and 2003.
The New South Wales Court of Appeal cited the case Hospital Products Ltd v United States Surgical Corporation (1984) as follows:
In Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 Gibbs CJ said at 64 that “an obligation to use ‘best endeavours’ does not require the person who undertakes the obligation to go beyond the bounds of reason; he is required to do all he reasonably can in the circumstances to achieve the contractual object, but no more”.
The Court stated that the key question is one of using best endeavours to locate available and suitable retail outlets not one of establishing retail outlets. The court found that Oceanwalk used best endeavours to locate retail outlets through its actions of identifying, visiting and investigating potential sites and that Mr Whippy misunderstood that the endeavour to locate was distinct from success in the endeavours.
Oceanwalk was found to have used its best endeavours to locate retail outlets within the territory. Mr Whippy therefore did not have ground to refuse renewal on the allegation that Oceanwalk breached the clause in question.
Failure to issue reports
Mr Whippy argued that Oceanwalk did not provide enough reports (it did not criticise the content of the reports).
The court found that the interval of “not less than thirty (30) days” in the master franchise agreement was the minimum interval and no maximum interval was specified. Therefore the only guide was “from time to time”. This was interpreted to mean that the reports should be provided at reasonable intervals of not less than 30 days.
The Court found that there was no evidence of what would be considered proper reporting intervals and also noted that there was no complaint by Mr Whippy as to the frequency of the reports until the day before the expiry of the master franchise agreement when Mr Whippy cited the alleged infrequency of reports as grounds for non-renewal.
The Court found that Oceanwalk met its reporting requirements and Mr Whippy therefore did not have ground to refuse renewal on the allegation that Oceanwalk breached that clause.
Result
Appeal dismissed with costs awarded to Oceanwalk.
Lessons for franchisors
In assessing whether the performance of master franchisees or franchisees might justify non-renewal (or early termination) it is important to consider:
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what the Agreement actually says, for example the difference between “using best endeavours” and actually succeeding at the underlying task;
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whether the Agreement sets clear enough performance standards; and
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whether you have adequately communicated what in practice will meet the performance standards you have set out in your Agreement.
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