Two of The Body Shop’s franchise agreements examined by court provided no right to terminate on reasonable notice, because of an unambiguous provision which in effect created self-replicating renewal rights.
The franchise agreements in question were entered into in the 1980s with a five-year term. They included a right to extend the term of the agreement on the same terms, expressly including the renewal term.
The court has recently ruled that the true construction of the clause meant the franchisee could, as it had done so to date and provided all of the renewal conditions were met, continue to exercise its right to extend the term for a further five years. Each time the agreements renewed so too did the right to renew.
The Body Shop failed in its argument that it had the right to serve reasonable notice of termination of the agreements, even where it was prepared to give three years’ notice. It framed its argument in two ways:
The court carefully examined the wording of the agreements in the context of the legal principles. This governed both construction of contracts, i.e how the language of an agreement should be interpreted, and when it is appropriate for the court to determine that an unwritten term should be implied into it as if it were expressly included.
In relation to the second element, the court was satisfied that the agreements did not operate indefinitely because there were certain conditions which had to be met, to allow the franchisee to exercise its right to an extension of the agreements. As a result of this, there was no legal rational to imply a right to terminate on reasonable notice. The Body Shop is now left without any ability to terminate these agreements unless the franchisee commits a breach, sufficiently serious that it gives rise to a right to terminate as a result of that breach.
It is not unusual for a franchise agreement to include limited rights of renewal. After all, an entrepreneurial franchisee may want certainty beyond the initial term offered by the franchise agreement, to ensure the necessary time to grow and make a success of the business.
However, even if it was not common practice in the 1980s, it is certainly the case now that such a right to renewal is limited such that it can only be exercised once. This gives the franchisor discretion as to a third term and beyond, without making them a hostage to the misfortune of being contractually stuck with a franchisee they would rather get rid of.
Franchisors should, in light of this judgment, revisit their standard terms offered to new and existing franchisees to ensure they are comfortable with how the renewal rights they have granted, operate in practice.
The judgment can be read here.
For more information, please contact our commercial disputes team.