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Immediate Franchise Termination For Endangerment Of Public Health And Safety: When Franchisors May Act

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By William Riddle, Law Clerk MST Lawyers & Alicia Hill, Principal, MST Lawyers

The recent case of Sondoananh Trading Company Pty Ltd v Couriers Please Pty Ltd decided by his Honour Judge Woodward in the Victorian County Court concerned the legitimacy of a franchisor’s termination of a franchise agreement on the basis of alleged threatening conduct by the franchisee towards customers. The Court decided that the franchisee’s conduct was grounds for immediate termination of the agreement.

The franchisor, Courier Please Pty Ltd (Couriers Please) runs a courier business using a coupon system that does not always require up-front payment from customers.

Mr Nguyen, the sole director and shareholder of the franchisee, Sondoananh Trading Company Pty Ltd (Sondoananh), had engaged in threatening behaviour towards a customer after the customer failed to pay their invoices.

The franchise agreement under which Sondoananh operated specified that the responsibility for accrued debts of more than 28 days would pass to the franchisor.

The case turned on whether the franchisor, relying on the threatening behaviour of the franchisee, had wrongly terminated the franchise agreement. The Judge also commented on the peripheral issue about whether the franchisor had breached the agreement by failing to resolve the dispute between the customer and Sondoananh.

Courts Reasons – Termination

Whether Couriers Please had breached the franchise agreement by their method of termination turned on the application of clause 17.4(e) of the franchise agreement, which allowed immediate termination of the agreement if actions by the franchisee ‘endangered public health and safety’.

Under s 29(1)(f) of the Franchising Code of Conduct (Code), immediate termination is permitted if the franchisee operates the franchised business in a way that endangers public health or safety.

Mr Nguyen had repeatedly posted threatening and intimidatory letters to a customer who had failed to pay. These included the repeated and heavy use of profanities, threats to damage the customer’s property, and threats to the customer’s livelihood.

In his Honour’s judgement, he stated

I initially had reservations about whether Mr Nguyen’s conduct leading up to the meeting on 27 August 2014 could fairly be described as conduct falling within clause 17.4(e) of the Franchise Agreement.  Is it conduct that “endangers public health or safety”?

The Judge ultimately found that the conduct did support immediate termination of the franchise agreement after Sondoananh conceded that conduct of this type may endanger public health or safety during the hearing. Relying on authority, it was decided by his Honour that the word ‘endanger’ captured threatening as well as actual behaviour, that “amounted to a real threat of not insignificant harm.”

However, even for severe conduct or misbehaviour which appears to be contrary to the franchise agreement, careful regard must be given to the exact wording of the agreement and which actions may trigger immediate termination. There are only a limited number of special circumstances that permit immediate termination under the Code.

When terminating the agreement, Couriers Please relied on how Mr Nguyen’s behaviour exposed them to potential damage; both to their reputation and possible legal action, citing a clause in the franchise agreement that forbade this type of conduct. They did not say at the time of termination that the franchisor also relied rely on clause 17.4(e) of the agreement, being the endangerment of public health and safety.

However authority from cases such as Shepherd v Felt and Textiles of Australia Ltd  and Carr v J A Berriman Pty Ltd meant that the Court found that Couriers Please could rely retrospectively on any conduct that amounted to sufficient grounds for immediate termination, even though different reasons were relied upon at the time of termination.

The Court found that the franchisor had validly terminated the franchise agreement due to the conduct of the franchisee.

Special attention was also given to whether Couriers Please had given appropriate notice of the immediate termination to Sondoananh.

There was some level of doubt surrounding whether Mr Nguyen had in fact been served with the Termination notice in person at the time of the termination.

Detailed file notes and evidence of the decision being considered assisted Couriers Please in proving that the immediate termination had not breached the agreement and that Mr Nguyen had understood and accepted the termination.

This case should remind franchisors that when taking any decisive action that affects the rights of a franchisee, the action should be firmly grounded in a clause contained within their franchise agreement, follow the steps set out in the franchise agreement for service or provision of notice and also comply with the Code.

Court Reasons – Responsibility for Resolving Disputes

Clause 10.3 of the franchise agreement read:

On behalf of all Contractors, Couriers Please will resolve disputes with customers (Including determining any refunds or other payments) and its decision will be final.

It was likely included to ensure that as the franchisor, Couriers Please, had full control over the resolution of disputes and franchisees would be bound by any such resolution.

However, the operation of this clause also placed an obligation on Couriers Please to take action to resolve disputes involving customers and its franchisees and decide on their outcome.

Franchisors should be mindful that clauses of this kind in franchise agreements create obligations for franchisors to take action if the type of situation described in the clause arises.

In this case, the burden fell on Sondoananh to show that Couriers Please had not taken steps to resolve the dispute.

As Sondoananh could not show this, the Judge did not rule on whether a breach of this type may have led to damages awarded to Sondoananh.

Franchisors should be aware of the obligations they agree to perform in their franchise agreement, and ensure that they act to meet those obligations or face potential action for breach of the franchise agreement and a claim for any loss or damage suffered.

If you would like to discuss any aspect of this article further, please do not hesitate to email Alicia Hill or call +61 3 8540 0200.