In Masterclass Enterprises Pty Ltd v Bedshed Franchisors (WA) Pty Ltd [2008] WASC 67 (13 May 2008), Justice Newnes of the Supreme Court of Western Australia, commented on requirements for a franchisee to directly supervise their business and the introduction on new agreements on the transfer of a franchise.
In this case the franchisor withheld their consent to the transfer of a Bedshed franchise because the business would not be under the direct supervision of anyone with a substantial interest in the proposed transferee. The franchisee claimed this provision was an unreasonable restraint of trade and the franchisor’s consent was unreasonably withheld. The franchisee sought a mandatory injunction requiring the franchisor to approve the transfer. Justice Newnes rejected both arguments and refused to grant the injunction.
Restraint of trade issues
The direct supervision requirement was not a restraint of trade because it did not prohibit the franchisee from engaging in any other business activities, nor was it designed to limit competition with Bedshed’s business. The rationale for this requirement was that direct supervision by the franchisee was most likely to ensure the success of the franchise business, to the benefit of both franchisor and franchisee. The requirement did not go further than was reasonably necessary to protect the franchisor’s legitimate interests.
Was consent to the transfer unreasonably withheld?
The franchisor did not act unreasonably in withholding its consent to the transfer on the ground that the franchise business would not be under the direct supervision of someone holding a substantial interest in the franchisee. Justice Newnes acknowledged the franchisor’s experience that owner operators were preferable to employed managers. He recognised that ownership provided greater motivation for the continuing success of the business and continuity and consistent quality of supervision.
Justice Newnes comments confirm that franchisors may require franchisees to directly supervise their franchise business and acknowledges the merit in owner operator franchises.
Was the proposed agreement Bedshed’s ‘current franchise agreement’
Clause 12.2 of the franchise agreement provided that the franchisor’s consent to any transfer would be conditional upon the transferee executing Bedshed’s ‘then current franchise agreement’. The agreement given to the transferee had recently been redrafted by Bedshed’s solicitors, approved by their CEO but not the board. Justice Newnes was not required to determine whether the franchise agreement given to the transferee was Bedshed’s ‘current franchise agreement’ but made the following comments in obiter:
'In my view a form of agreement which is not the subject of any binding agreement with an existing franchisee but is simply a form of agreement, which at a particular point in time, Bedshed wishes future franchisees to enter into, is not Bedshed’s ‘then current franchise agreement’ within the meaning of cl 12.2 of the franchise agreement. Clause 12.2 contemplates an agreement already in force between Bedshed and a franchisee, not one which is, in truth, simply, at a particular point in time, the form of agreement that Bedshed wishes future franchisees to enter into. The rather ephemeral natural of the proposed form of agreement put to the Nixons is illustrated by the fact it has already undergone further revision by Bedshed.’
It is common for franchise agreements to make renewal and transfer conditional on the franchisee or buyer signing the then current agreement (which may be different from the agreement being renewed or transferred) as changes to a franchise agreement can only be introduced unilaterally at points of time in an existing relationship where a new contract is required to be signed. Beyond these situations, amendments to the agreement may only be made with the agreement of both parties.
It is widely believed within the legal profession and franchising sector that franchisors may introduce a new agreement on renewal or transfer. Justice Newnes has suggested that the agreement must have already been signed by another franchisee in the system for it to be the franchisor’s ‘then current franchise agreement’. Justice Newnes statement has not been confirmed in subsequent cases and is not binding.
If a franchisor expects a large number of franchise agreements to be renewed at the same time, they may consider having a new franchisee sign the form of franchise agreement they intend renewing franchisees to sign.
We are interested to see if Justice Newnes line of reasoning develops further.
