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The Importance Of Understanding Your Franchise Agreement

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By Joshua Beaver, Lawyer, MST Lawyers

Context

In the case of Mr Rental Australia Pty Ltd v IRD Services Pty Ltd [2016] NSWSC, Mr Rental Australia Pty Ltd (MRA), the franchisor, entered into franchise agreements with the defendants who operated franchise businesses under the “Mr Rental” name. As a result of conduct resulting from the introduction of a new operations model for the franchise network (devised by MRA and funded by the franchise marketing fund), the franchisees attempted to terminate the franchise agreements in mid-2015. While MRA denied these claims they, in turn, sought termination themselves due to what MRA saw as the wrongful termination by the franchisees of the franchise agreements.

Upon termination, the franchise agreements gave MRA the option to purchase the assets of the franchisees. The franchisees disputed this term of the agreement and its applicability to the circumstances. MRA then issued court proceedings seeking orders allowing it to purchase the franchisee’s assets. 

Issues

The court considered a number of different issues in the case. They included:

  • Whether MRA should be able to exercise its right to purchase the business assets;
  • Whether the agreement had been validly terminated by either party; and
  • Whether MRA’s conduct amounted to repudiation (which is the legal term for wrongful termination of a contract).

The Judgment

  1. The court firstly considered whether or not the right to purchase the business assets applied given the circumstances. The franchisees argued that it would not make commercial sense for MRA to have the benefit of such an option when it was MRA that had caused the termination of the franchise agreement. The Court disagreed with this argument because it overlooked the damages – both for the loss of benefit of the agreement and any inadequate compensation for the assets that the franchisees would be entitled to.
  1. The court also considered whether termination under the general law (and not under any express term of the agreement itself), permitted MRA to exercise its option to purchase the assets. The language of the clause that contained the option stated that the ability to purchase the assets applied if the agreement was “terminated for any reason”. The Court noted that “clear words are needed to rebut the presumption that a contracting party does not intend to abandon any remedies for breach of the contract arising from the operation of the law”. With this in mind, the Court deemed that the contract contained “no such clear words” and therefore, MRA maintained the right to terminate in any instance in which the franchisees wrongly repudiated the agreement themselves.
  2. Finally, the Court found that the breaches of MRA did not amount to repudiatory conduct and subsequently the franchisees were not entitled to terminate the agreement.

Impact of decision

Franchisees and franchisors should consider the following in the wake of this decision.

  • The rights of franchisors to purchase business assets will be preserved even in instances where the franchisor has repudiated the contract. This does not limit a franchisee’s ability to pursue damages as a result of this conduct and any inadequate compensation it receives for the assets; including loss suffered by reason of the acquisition of the assets.
  • Clear language needs to be used when drafting franchise agreements. In the absence of clear language, general law duties will operate to bind the parties.
  • A party to a franchise agreement should seek legal advice before terminating any franchise agreement.

 For more information on franchising agreements please contact our Franchising team by email or call us on +61 3 8540 0200.