Franchise case law update: You've been served

English High Court confirms that a franchisor validly denied a franchisee a renewal because it had failed to provide its accounts.

The English High Court recently considered the validity of a franchisor's counter notice opposing the extension of a franchise agreement. In the case of Winkworth Franchising Ltd v Goble [2023] 7 WLUK 235, the franchisee had failed to provide accounts within the time frame required under the agreement. By way of summary judgement, the court granted a declaration in favour of the franchisor.

The facts

In 2002, the claimant ("Winkworth Franchising Ltd") and defendant ("Goble") entered into five 20-year franchise agreements (the "Agreements") in respect of the sale and letting of property in London. Goble had a right under the Agreements to twice extend them by ten years. Winkworth could refuse to extend on specific grounds, including if the Goble had breached any contractual obligation.

Here, the alleged breach of contract was in relation to Goble's failure to provide Winkworth with annual accounts for the year of 2020, which Goble was obliged to produce by May 2021. Goble failed to produce the account following several requests from Winkworth. In 2022, Goble notified Winkworth that it wished to renew the Agreements. Winkworth issued a counter notice on the basis that the defendant had failed to provide the required information: namely the accounts, and receipts proving that rent had been paid on the franchises.

In response, Goble asked for additional time and contended that the counter notice was not valid. Winkworth issued a further counter notice in March 2022 and again requested the accounts. They were provided in April 2022. In October 2022, Winkworth sent a letter of summary termination of the franchises citing a fundamental breach of contract which entitled it to validly terminate the Agreements without extension.

Goble contended that:

• the breaches were not sufficiently material to justify the sanction of a refusal of an extension;
• the requests for information by Winkworth were insufficiently clear and that no rent receipts existed;
• Winkworth was estopped by convention as an understanding had arisen that there was no specific time frame for the provision of accounts; and
• Winkworth was unfairly trying to find fault so that it could take over the franchises or enter into new agreements on different terms.

The outcome

In a summary judgement application, Judge David Elvinis KC ("Judge Elvinis") was required to consider whether Goble had a 'realistic prospect of success'. A realistic claim must carry some degree of conviction and be more than merely arguable. Here, the issue was whether Winkworth's refusal to extend the Agreements was valid on the basis that Goble had failed to comply with its terms. One franchise agreement was before the court as an example of all five.

Judge Elvinis concluded that there was no legal basis on which the court could ignore the terms which had been agreed to the parties and an additional requirement of materiality should not be imported in the Agreements. Winkworth's requests for accounts had been 'legitimate and sufficiently clear' and Goble's argument that a common assumption had arisen to estop the claimant was not relevant to whether the terms of the franchise agreement had been breached.

Winkworth had a realistic prospect of success at trial and a declaration that it had validly served a counter notice to terminate the agreement in October 2022 was granted.

Key takeaways

This case highlights the importance of having clearly drafted conditions for renewal, and that the English courts are reluctant to import an additional requirement of materiality if a franchisee is in breach of those conditions. Judge Elvinis noted that the court "was not entitled to rewrite an agreement", as considered in Lombard North Central Plc v Butterworth, 1987. In this case, the request for accounts by Winkworth had been legitimate, sufficiently clear and repeated; and therefore, any "understanding" or common assumption that may (or may not) have arisen between the parties during the relationship, is not relevant to whether the terms of the agreement had been breached. 

The judgment appears to be aligned with the principles of the BFA's code of ethics, which states the following in respect of renewals of franchise agreements:

1. that the terms applicable on renewal should be those contained in the franchisor’s then current terms of the franchise agreement (and note that the bfa expects that any changes in financial terms on renewal should be fair to both franchisor and franchisee);
2. that no unattractive commercial terms may be introduced as a mechanism to discourage renewal;
3. an obligation on the franchisee to remedy any existing breaches and to have substantially observed the terms of the existing agreement (but note the bfa’s expectation that the franchisor will have been working on a remedial plan with a franchisee who is not meeting the required standards, so that the franchisee has a fair opportunity to improve performance before their renewal date);
4. a right not to accept a late application for renewal if a franchisee has failed to comply with the notice provisions in the renewal clause.

The key points in the context of this case are 3 and 4. If a franchise agreement contains a renewal condition that the franchisee should be in compliance with the franchise agreement in order to qualify for a renewal, franchisees need to take that at face value and ensure that they operate in compliance and remedy breaches within any notice period. In this case, the franchisee took almost a year to provide the accounts, and accounts are an important source for information for a franchisor to manage its network effectively. Relying on implied terms or estoppel by convention is unlikely to overturn a clearly drafted renewal clause, even if the franchisee feels that it is being unjustly denied a renewal.

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