Case update - When is a franchisor unreasonable to withhold consent under a Franchise Agreement?
It is common for certain rights of a franchisee under a franchise agreement to be exercisable only if the franchisor gives its consent, such consent "not to be unreasonably withheld". Examples of such rights might be in relation to the change of a key person; change of the franchisee's trading location; change in the franchisee's corporate structure; or a sale or assignment of the franchisee's business.
Historically, there has been little guidance from the English courts as to what constitutes unreasonable withholding of consent in a franchise agreement (or indeed in any commercial contract). However, in the case of Porton Technology Funds and others v 3M UK Holdings Limited and another EWHC 2895 the High Court confirmed that the principles developed in landlord and tenant disputes concerning this phrase should be applied in commercial cases and therefore will equally apply to franchise agreements.
What are the relevant principles?
Following the Porton case, the principles which the court will apply in assessing whether a franchisor has been unreasonable to withhold consent under a franchise agreement are:
- the franchisee will have to show that the franchisor's refusal to give consent was unreasonable. Putting the onus of proof on the franchisee gives the franchisee a large hurdle to overcome at the outset;
- what is reasonable in each case will depend on the individual facts;
- a legitimate refusal does not have to be objectively right or justified but it must be based on reasonable commercial grounds; and
- the franchisor is not obliged to consider the franchisee's interests when making its decision. If the franchisee would suffer disproportionate detriment as a result of the franchisor's refusal the refusal can be deemed to be unreasonable. However, disproportionate detriment is likely to be only found in extreme cases.
Practical tips for dealing with requests from franchisees
When a franchisee makes a request to exercise a right for which the franchisor has to give its consent and such consent must not be unreasonably withheld, the franchisor should:
- view and consider the request in an open and fair way;
- consider each request on its own individual merits rather than adopting a draconian blanket policy;
- give clear and fair reasons for any refusal; and
- also keep a note of the reasons for granting a request (so that the franchisor can explain why a request from one franchisee may have been refused but one from another franchisee granted).
The above steps will make it easier for the franchisor to later prove (if needed) that its decision was based on reasonable commercial grounds. It should also help to reduce the risk of challenges by franchisees, thereby avoiding litigation. Any franchisee seeking to challenge a franchisor's refusal to grant consent is going to have a large hurdle to overcome (primarily because the onus is on the franchisee to prove that the franchisor has acted unreasonably.) It is not, however, an impossible hurdle. A franchisee who is able to prove that consent has been unreasonably withheld could have a substantial claim in damages against their franchisor.