Franchise Case Law Update: The Body Shop does not come up smelling of roses

In Burke Partnership (A Firm) v Body Shop International Ltd - Chancery Division - [2023] EWHC 2897 (Ch), the English High Court was asked to declare whether a franchisor's notice to terminate two franchise agreements (which had been in force since the early 1980s) on reasonable notice, was valid. The court declared that it was not, as there was no contractual right to terminate for convenience and Body Shop's counterclaim for alternative declarations was unsuccessful.

The case highlights the importance of clear drafting around contractual renewals and managing renewals effectively, in particular for franchise networks which comprise of "legacy" agreements.

Background

The Burke Partnership (a firm) ('TBP') operates three Body Shop retail store franchises (one in Norwich and two in Cambridge), pursuant to two franchise agreements with The Body Shop International Limited ('Body Shop'), entered into in April 1981 and September 1982 respectively (the "Agreements"). The Agreements are on materially identical terms and over the course of more than thirty years, the parties renewed the term of both Agreements every five years via an extension letter. During this time, the parties did not seek to renegotiate the terms of the Agreements as part of any renewal process.

In 2020/2021, having attempted and failed to introduce a new set of Agreements or alternatively agree a buy back of the stores, Body Shop served notices to terminate the Agreements on three years' notice, citing that the franchised stores did not match their current business model, the Agreements were hopelessly out of date and no longer fit for purpose, and that the Agreements were not intended to run perpetuity, this entitling Body Shop to terminate on reasonable notice.

TBP rejected the validity of the notices, stating that the Agreements contain no express right for Body Shop to terminate for convenience, TBP was not in breach, the Agreements did not prevent Body Shop from updating the "Method", which TGP was obliged to follow, and the Agreements did not run in perpetuity, but in a series of five year terms, which could be renewed or terminated if TBP is not in compliance (TBP also had a right to terminate for convenience on annual basis). TBP commenced proceedings against Body Shop in the High Court seeking declarations that the notices were invalid and that the Agreements remained in force.

Issues

Clause 3(b) of the Agreements states as follows:

"[TBP] shall be entitled to extend the term of this Agreement on the same terms and conditions as are herein provided including the provisions of this Clause for a further period of Five Years from the expiration of the term of this Agreement by giving to [Body Shop] a written notice at least three months before the expiration of the term of this Agreement requiring such extension and subject to the Operator having complied with its obligations hereunder in all respect this Agreement shall be extended for a further period of five years from the expiration of the current term"

Body Shop contended that Clause 3(b) provides for one single five-year extension and no more. It said that it should not be expected that the Agreements would run in perpetuity, as this would lack commercial sense and would have been an "extraordinary right to grant". Unlike TBP, Body Shop did not have an express unilateral right to terminate and Body Shop contended that the absence of this reciprocal right was explained by the fact that the Agreements were not intended to run beyond five years, plus one five-year renewal. In summary, Body Shop urged the court to choose between rival interpretations by opting for the interpretation which reflected the factual matrix and commercial common sense, and reject the meaning which produced the most extreme result.

Decision

The judgment contains a useful summary of the rules of contractual interpretation in English contract law, in accordance with which the court rejected the interpretation offered by Body Shop for the following (non-exhaustive) reasons:

1. There was already express provision for the determination of the Agreements (i.e., a renewal process and rights to terminate for breach, or for convenience on the part of TBP). Therefore, whilst it is possible that the Agreements can be renewed in perpetuity (TBP always wanting to renew and always being in compliance, and Body Shop continuing to exist), this is not the same being a perpetual agreement. Therefore, seeking to imply a right to terminate for convenience would conflict with the express terms, and must therefore be rejected.
2. The Agreements did not lack commercial or practical coherence in the absence of the desired term, which was not necessary to enlighten the business efficacy or legitimacy of the Agreements. The parties were committed to their respective obligations under the Agreements, including Body Shop's ability to amend the Method with which TBP was obliged to comply.
3. The term sought was not so obvious that it went without saying, meaning it could not be implied so easily, and the threshold for implying a term would not be construed by the court so readily.
4. Interpretation is an iterative process, and the court should check rival meanings against the rest of the agreement and the commercial consequences. In this case, at the point at which the Agreements were entered into in the early 1980s, Body Shop (and franchising generally in the UK) was in its infancy, and the deal struck was not extraordinary in this context. The fact that it might be judged to be so by today's standards in franchising is to apply commercial hindsight, and this cannot be factored into the interpretation process.
5. Similarly, the court rejected Body Shop's contention that as the Agreements were 'hopelessly out of date' and lacking basic legal updates such as data protection or Bribery clauses, it follows that there had to be an implied term to enable Body Shop to terminate on reasonable notice. This was not credible, given that the parties had renewed the Agreements repeatedly, TBP had operated the stores successfully for so long and Body Shop was entitled to amend the Method. Body Shop could not have advanced this implied term when the Agreements were signed.

Takeaways

• First and foremost, it is unusual to see a franchisee defeat a franchisor in the English courts. However, this fact alone is not reason enough for franchisors to panic. As with the Dywer case (Dwyer (UK Franchising) Ltd v Fredbar Ltd and another [2022] EWCA Civ 889) last year, these cases are very fact-dependent. The reality is that most franchise systems in the UK came into existence long after these Agreements were entered into, and this situation will not arise often. Nevertheless, all franchisors should take the opportunity to review their renewal processes, criteria and contractual terms, to ensure there are no "ticking time bombs" woven into the fabric of their networks. This is underscored by two other cases which hit the courts this year; Winkworth Franchising Ltd v Goble (Winkworth Franchising Ltd v Goble [2023] 7 WLUK 235) and Hunters Franchising Ltd v Brybond Ltd (Hunters Franchising Ltd v Brybond Ltd and another [2022] EWHC 3195 (Comm).

• For franchise systems which have been operating for a long period of time, and which therefore may have a stratified network with an existing cohort of "early adopters" on outdated/legacy contracts, this case may be uneasy reading. Franchisors should think carefully before engaging in a process of imposing a new franchise agreement, or terminating on reasonable notice, if the underlying agreement does not allow for this.

• The English courts remain hesitant to imply terms. The court will only do so if the implied term does not interfere with the express terms, is required to correct a manifest error or is so obvious that it does without saying.

• In relation to interpretation, the courts will not consider commercial hindsight, but will look at the factual matrix as it existed at the time, and what would have been commercial common sense to the parties when they entered the agreement. Time is irrelevant – the commercial bargain as agreed over 40 years is still persuasive.

• On this point, franchisors which do have legacy contracts of a similar vintage will probably lack the corporate memory of what was agreed, discussed and in the parties' contemplation at the time. Keeping accurate records of renewals and key correspondence is an important part of contractual housekeeping. If may not have changed the outcome for Body Shop, but the absence of any testimony from anyone who was involved with the original Agreements is noteworthy.    

• A repeating right to request a renewal does not amount to a perpetual contract. These days, most well drafted franchisee agreements will define a maximum term or maximum number of renewals, and include specific renewal conditions, such as entering into the then current standard form renewal agreement. Renewing "terms" as opposed to "Agreements" may create unintended consequences.

• Court declarations are a useful tool in litigation, particularly where damages would not be an adequate remedy, enabling parties to resolve uncertainty over major aspects of their claims before proceeding to full trial. Declarations caught the headlines during the Covid pandemic in the case of Canary Wharf v European Medicines Agency (EMA). Here, the court’s declaration that Brexit was not a frustrating event did not cause an order that the EMA be injuncted from terminating the lease. Instead, the effect of the court’s declaration was the knowledge that the EMA could not terminate the lease and argue that Brexit was a frustrating event, so as to prevent their being liable following breaking the lease.

• Franchise systems face an inherent tension between requiring on the one hand, long term legal and financial commitments, but on the other hand having to respond to changes in customer habits and market trends, which may require updates and changes beyond manual updates. Introducing a right to terminate on convenience would undermine a franchisee's ability to raise finance, and act as a break of system growth. Equally, a similar right for franchisees would devalue the network.

• Finally, don’t underestimate the power of a longstanding franchisee!

If you require any further information in relation to this area, please do not hesitate to contact Gordon Drakes.

With thanks to Hannah El-Gazzar, Trainee Solicitor for co-authoring this article.