In the recent case of BB Australia Pty Ltd v Karioi Pty Ltd [2010] NSWCA 347, the court considered the rights of the franchisor, Blockbuster, after the end of a franchise agreement and in particular: 

  • whether the agreement had been terminated or had expired; and 
  • the enforceability of the restraint of trade clauses.

Background

In April 1998 Blockbuster and Karioi entered into 2 franchise agreements to convert Karioi's existing video store businesses into Blockbuster stores. The initial term ended in April 2008. With Blockbuster's approval, Karioi continued to operate the stores as Blockbuster stores at both locations after the expiration of the initial term while the parties negotiated a renewal of the agreements. The negotiations were unsuccessful and both parties purported to terminate the agreements. Blockbuster then commenced proceedings seeking orders, to enforce the restraint of trade provisions in the franchise agreement and that Karioi was required to sell certain assets of Karioi's businesses to Blockbuster.

Termination or expiry?

Blockbuster had certain rights upon termination of the franchise agreements (which did not apply upon expiration). In particular, Blockbuster's right to require Karioi to sell assets of its businesses to Blockbuster only arose upon termination. The court looked at the correspondence between the parties and concluded that the communications showed an understanding that Karioi would continue to operate as a Blockbuster franchisee until it either renewed the franchise agreements, or the negotiations concluded without agreement. The court noted that there was a mutual assumption that if the parties were unable to reach agreement upon the terms of the renewal Blockbuster's consent to Karioi's operation of the franchises would be withdrawn. Relevant factors considered by the court were:

  • correspondence from Blockbuster that suggested Blockbuster would consider exercising rights that only arose upon expiry of the agreements; and 
  • with the exception of the making of an agreement in writing "to cancel" the agreements, all of the circumstances justifying termination required a default by Karioi (and no such default was alleged).

Restraint of trade

The court considered whether it was necessary to enforce the restraint of trade provision in the franchise agreement which would prevent Karioi from operating a similar business and found that it was not necessary as: 

  • the goodwill in Blockbuster's brands and systems was sufficiently protected by other clauses in the franchise agreements which prohibited the franchisee from using Blockbuster's intellectual property and confidential information after the end of the agreements; 
  • Blockbuster did not have any goodwill in the specific location of the premises as Karioi already operated its business from the premises prior to becoming a Blockbuster franchisee and Blockbuster had not acquired any interest in the the premises upon granting the franchise to Karioi; and
  • there was no evidence that the Karioi would have an unfair advantage over a new franchisee because there was no reason, apart from the location of the stores, that customers would frequent a non-Blockbuster store conducted by Karioi rather than a Blockbuster store in a similar area.

Key learnings for a Franchisor from this case 

  • Understand the implications of the expiry of franchise agreement compared with termination under your franchise agreement.
  • Ensure communications with franchisees are clear and consistent particularly regarding expiry or termination. 
  • Courts may not uphold a restraint of trade where there are other ways of protecting goodwill, such as clauses preventing a party from using the other party's confidential information and intellectual property. 
  • Ensure that if a franchisor considers that it has good will in particular location where the franchised business, (particularly where the franchisee holds the lease) documents are in place to protect the franchisor's goodwill such as a step-in deed.