A recent opinion from the United States Court of Appeals for the Eighth Circuit reinforces the lesson that the words used in a franchise agreement matter. In H&R Block Tax Services v. Franklin, the Court of Appeals concluded over a strong dissent that H&R Block had the right to terminate two franchise agreements where those agreements expressly stated that Franklin could terminate at any time but only affirmative allowed H&R Block to terminate for cause.
The key language of the franchise agreements at issue stated as follows:
"The initial terms of this Agreement shall begin on the date hereof and, unless sooner terminated by Block [for cause] as provided in paragraph 6, shall end five years after such date, and shall automatically renew itself for successive five-year terms thereafter (the “renewal terms”); provided, that Franchisee may terminate this Agreement effective at the end of the initial term or any renewal term upon at least 120 days written notice to Block prior to the end of the initial term or renewal term, as the case may be."
H&R Block terminated the Franklin's franchisee agreements and then sought a declaratory judgment that the language allowed it to terminate the agreements. The District Court disagreed with H&R Block, interpreting the language to allow the franchise agreements to continue in perpetuity. Similarly, the District Court concluded that H&R Block could not terminate without cause.
The Court of Appeals, reviewing the case de novo, first concluded that the District Court correctly chose to apply Missouri law, which was the choice-of-law the franchise agreements specified. Missouri law, the majority of the Court concluded, disfavor and “are prone to hold against” the theory that a contract imposes an obligation in perpetuity.
Nonetheless, the Court initially noted that the practical effect of the contract language is to create a contract of perpetual duration. However, the majority found a key distinction in Missouri law between an intention to create a contract of perpetual duration and an intention for the contract to be perpetually enforceable. In this instance, the majority of the Court concluded that the contract did not express such an intention.
Specifically, the Court found that the words of the agreements did not express an unequivocal intent for the franchise contracts to last forever. It pointed to be absence of words such as “perpetual”, “everlasting”, “eternally”, or “for all times”. It also noted that the clause in the franchise agreements providing for renewal every five years contradicts an intention that the contract would last forever.
There was a spirited dissent to the opinion of the majority. The dissent argued the overriding public policy concern of Missouri law regarding interpretation of contracts is to ascertain the intention of the parties and to give effect to that intention. The dissent found that the plain language of the agreements did not provide H&R Block with the right to terminate them without cause. As such, while acknowledging the public policy against perpetual contracts the majority relied upon, the dissent states the majority essentially re-wrote the franchise agreements to provide H&R Block with a right it did not bargain to receive. The dissent believed granting this right to franchisors left franchisees “without contractual protection from a potentially abusive franchisor”. The dissent seemed particularly concerned because the agreements did not contain buy-out provisions.
No matter what your position in the franchise world, the Eighth Circuit Court of Appeals decision bears note. In particular, it reminds everyone that contract interpretation by courts can be dicey. In this case, two judges—the District Court judge and the dissenting Circuit Court judge—reached one conclusion while two other judges—the Circuit Court majority—reached the opposite conclusion on the same language. At the end of the day, the narrowness of the decision cannot be comforting. If you want your intentions in a contract to be clear, make sure the plain language reflects those intentions.