Franchise case law update: To approve or disapprove? Lessons on good faith, contractual discretion and interpretation
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Background
The master franchisee (Brybond) had entered into a renewal regional master franchise agreement (MFA) in 2014 for the Hunters estate agency. The MFA included a development schedule requiring Brybond to meet certain development targets within its allocated territory of Leeds, failing which Hunters could withdraw exclusivity.
The MFA required Brybond to propose prospective franchisees for approval by Hunters, and Hunters could approve or disapprove these proposals at its discretion.
When the time came for renewal of the MFA, it was not disputed that Brybond had failed to comply with the development targets. However, Brybond argued in defence of the breach that Hunters did not act in good faith because it allowed a position to develop in which the only question Hunters asked or answered, when deciding whether to approve each of Brybond's proposals, was whether an existing franchisee (who had reached a settlement with Hunters which affected the part of allocated territory in the MFA), would suffer under that proposal and Hunters did not allow itself to either measure that disadvantage objectively or to contrast it with the disadvantage to anyone else with whom it had legal relations by the rejection of that proposal. In consequence, it was argued, Hunters did not use its power (or veto) to reject (or approve) proposals, for the purpose for which that power was granted, but, rather, used it for an ulterior purpose; either to favour the other franchisee or to put Brybond in breach of the MFA.
In an unusual turn of events, during the second round of closing submissions, counsel for Brybond sought to reframe Brybond's complaint against Hunters, by essentially dropping the contention that there was a broader, more free-standing, implied duty of good faith in the 2014 MFA (which had been breached), and instead asked the judge to consider if Hunters had breached a Braganza implied term when exercising its contractual discretion to approve or disapprove a development proposal.
What is the Braganza duty?
Citing Chapter 14, Section 11 of Lewison: The Interpretation of Contracts (7th ed), the parties agreed that the following summary accurately describes the meaning of the Braganza duty:
"Where a contract confers a discretion on one party, and the exercise of that discretion may adversely affect the interests of the other party, it will usually be implicit that the discretion must be exercised honestly and rationally and for the purpose for which it was conferred. An exercise of contractual discretion may be challenged on the same grounds that apply to a challenge to an administrative decision in public law.
…if a contract confers an apparently unfettered discretion, then that discretion must not be exercised capriciously or unreasonably…"
The parties further agreed that a Braganza duty did apply to the manner in which Hunters exercised its discretion to approve or disapprove Brybond's proposals.
On the facts on this case, the reformulation for the question of whether there was a breach of the Braganza duty was as follows: was any rejection, by Hunters, of any of the proposals irrational or for an ulterior purpose? Brybond did not allege that Hunters acted dishonestly.
The decision
The court held there was no breach of the Braganza duty, either on grounds of irrationality or for an ulterior purpose.
Hunters had a consistent policy relating to exclusivity and allocation of development opportunities, it did consider the impact of its decisions on the relevant franchisees and it dealt openly with Brybond, reminding Brybond of this policy, considering other proposals with an open mind, and suggested refinements to the proposals in question.
There was a commercial justification in reducing the risk of conflict between franchisees, in pursuit of a common purpose to develop the brand in the Leeds area.
The court was also asked to consider whether Hunters could claim damages for the breach of the development obligations, despite the MFA only referring expressly to loss of exclusivity.
The judgment (paragraphs 139-141) provides a useful summary on contractual interpretation. On the facts of this case, the judge held that the MFA did not exclude a damages remedy for breach of the development obligations, referring to witness statements which supported the view that an exclusion of damages was not discussed, the facts that (i) there was no express exclusion in the MFA, (ii) previous versions of the MFA and their side letters were inadmissible as evidence in relation to this MFA, (iii) the MFA was drafted professionally and (iv) if a party intends to abandon a remedy for breach which arises by operation of law, clear express words should be used.
What lessons can be learned?
The ruling in this case confirms a growing line of authority that the courts are unwilling to imply general duties of good faith, unless there is a clear contractual gap to address. The case also serves to remind us that the Braganza duty differs from a general implied duty of good faith and applies only to where one party is able to exercise discretion on a matter that affects both parties with differing interests. Failure to comply with the Braganza duty is a high bar, but franchisors should nonetheless take care to develop criteria for matters requiring consent, and fully document a record of the decision making process when exercising any such discretion. They must be prepared to evidence that the decisions have not been made in a way that could be considered dishonest, irrational or capricious or for an improper purpose.
Additionally, where possible, franchisors should aim to adopt a consistent approach when exercising discretionary powers. Being able to point to deciding factors which are regularly taken into account can be significant evidence as to the rational and fair application of a discretion.
Finally, on the subject of remedies, this case serves as a useful reminder that an express statement confirming one type of remedy (in this case, loss of exclusivity) should not be construed as meaning an exclusion of all other remedies – if that is the intention, draft it!
If you require any further information in relation to this area, please do not hesitate to contact Gordon Drakes.
With thanks to Jamal Moursy, Trainee Solicitor for co-authoring this article.