Hunters Franchising Limited v Brybond Limited & Anor.

A contractual power to approve or reject a proposed franchise location must ordinarily be exercised honestly, rationally and for the purpose for which it was conferred. A franchisor may take account of the commercial effect on existing franchisees and the parties’ common purpose, provided that its decision is not arbitrary or taken for an ulterior purpose.

Contractual provisions dealing with loss of exclusivity, termination or withholding payments do not exclude a damages remedy unless clear words, or the admissible contractual context, establish that intention.

The claimant franchisor sued its Leeds master franchisee and its principal for breaches of a master franchise agreement. The defendants conceded that they had failed to satisfy annual development obligations requiring specified numbers of franchise agreements and premises to be opened.

The remaining issues concerned whether the franchisor’s approval decisions concerning proposed new franchises breached a Braganza-type implied term, whether any such breach could answer the development claim, and whether clauses 9, 10 and 12 constituted a complete remedial code excluding damages.

1. Approval discretion. The parties accepted that the franchisor’s power under clause 4.2 to approve or reject a proposed location was subject to an implied term requiring honest and rational exercise for the purpose for which the power was conferred. The court therefore did not need to decide whether a broader, free-standing duty of good faith was implied.
2. No breach. The franchisor’s policy of avoiding exclusive franchises which would damage existing franchisees was commercially justified and consistent with the common purpose of developing the brand while avoiding conflict. The evidence showed that it measured the likely effect on the affected franchisee, considered the master franchisee’s financial interests, dealt openly with him and remained willing to consider workable alternatives. The rejections were neither irrational nor for an ulterior purpose.
3. The franchisor’s earlier view that Adel presented no conflict did not control later decisions. Circumstances had changed because neighbouring franchisees increasingly farmed the relevant free territory.
4. Remedies. Applying the contractual construction principles summarised in TAQA Bratani Ltd v Rockrose UKCS8 LLC [2020] 2 Lloyd’s Rep 64, particular weight was given to the professionally drafted agreement. Clauses 10 and 12 dealt with loss of exclusivity and termination, but contained no clear words excluding damages for breach of the development requirement. Clause 12 operated only on termination and could not sensibly exclude a damages claim brought before termination. Clause 9 likewise contained no clear exclusion and did not provide a complete compensation regime.
5. Judgment was therefore given for the claimant on liability for the defendants’ admitted breaches of the development requirement. Consequential orders and outstanding case-management matters were reserved for further submissions.