The Privy Council in London recently decided the case of Dymocks Franchise Systems (NSW) Pty Limited v Bigola Enterprises Limited.
The Privy Council overturned the New Zealand Court of Appeal's decision and ruled that Dymocks was justified in terminating franchise agreements with John and Alicia Todd, who had repudiated their contracts.
The Todds and their companies, Bigola Enterprises Limited and Lambton Quay Books Limited, operated three franchises in New Zealand. They claimed that Dymocks had misrepresented the initial position in relation to the projected turnover, and its intention to open 20 to 25 outlets around New Zealand. Dymocks blamed a fall in sales and profitability on inefficient management by the Todds. The Todds responded by criticizing Dymocks in a letter to other franchisees, adding that they would refuse to take any further part in Dymocks's activities.
Dymocks viewed the letter as an incitement to other franchisees to act against it. Dymocks said that the letter "clearly indicated the Todds no longer wanted to work within the franchise system" and it terminated the agreements.
The Auckland High Court rejected the Todds claim that Dymocks had misrepresented the business and ruled that the termination was lawful. However, the Court of Appeal reversed, which lead to an appeal to the Privy Council.
Meanwhile, Dymocks had taken control of the Todds' stores, managed them for some time and subsequently refranchised them. Thus, if the Todds had won, they may have been entitled to a substantial award of damages.
The Privy Council said that one of the advantages of franchise trading is that a larger group, if coherent and disciplined in its activities, is a more powerful market unit than the franchisees individually. The Privy Council said that:
"a refusal to conform to the norms of general behaviour is damaging not only to Dymocks as the franchisor but also to all franchisees in the group. In a non-technical sense the franchisor and all the franchisees are engaged in a joint venture."
The case was tried under Australian law. The decision has ended a four-year legal action, and the Todds have been ordered to pay the costs of all hearings, which are estimated to exceed A$4 million.
Arguably, the Privy Council's comments about joint ventures are misleading, as franchises and joint ventures may be quite different.
The case is important in the area of franchising as it confirms that the obligations between the parties are paramount and must be adhered to.
Finally, the Privy Council decision did not consider Dymocks's submission in relation to an implied obligation of good faith. Although the contract did not mention it, Dymocks maintained that franchisees must act properly and must show good faith towards the franchisor. This submission is still to be judicially tested. While some cases in the United States seem to have implied a such a duty, this doctrine has yet to be developed in New Zealand and Australia.
For further information on this topic please contact Stewart Germann at Stewart Germann Law Office by telephone (+64 9 308 9925) or by fax (+64 9 308 9922) or by email ([email protected]).