In the recent case of Civic Video Pty Limited v Yogies Pty Limited [2011] NSWSC 1107, the NSW Supreme Court considered outlined the circumstances in which a franchise agreement can be deemed to have been renewed for a further term despite the franchisee not signing new franchise documents.
Background
In July 2000, Civic Video Pty Limited (franchisor) and Yogies Pty Limited (franchisee) entered a franchise agreement, under which the franchisee was granted the right to operate a Civic Video franchise for a term of five years. The franchise agreement also gave the franchisee an option to renew for a further term of five years, subject to fulfilment of certain criteria, including that the franchisee sign the then current Civic Video franchise agreement.
Leading up to the expiry of the original franchise agreement in 2005, the franchisee attempted to sell its business. The franchisee was unable to sell the franchise prior to the expiry of the term and requested that the franchisor allow it to continue the franchise on a month-to-month basis until it found a buyer. The franchisor refused the franchisee’s request and insisted that if the franchisee wished to continue operating the franchise it must enter into their current form of franchise agreement.
The new franchise agreement differed from the original franchise agreement in significant ways, including that the term would be for ten years rather than five, as contemplated in the original franchise agreement. Further, the royalty payable under the new franchise agreement would be calculated on total turnover rather than gross turnover and there was now an advertising fee of 2% of total turnover.
The franchisee sent the franchisor a notice exercising its option to renew the franchise agreement for a further term. On that basis, the franchisor prepared a new franchise agreement, which was mailed to the second defendant, Mr Munchik, a director of the franchisee. The documents were never signed and were not returned to the franchisor.
In his evidence, Mr Munchik claimed that he never opened the envelop containing the new franchise agreement. Mr Munchik argued that he had neither read nor agreed to the terms of renewal and therefore the franchisee should not be bound.
The franchisee argued that the new franchise agreement differed so greatly from the old franchise agreement that it could not be called a renewal. The franchisee claimed that the different terms in the new franchise agreement were unconscionable as they departed so substantially from the original franchise agreement.
The Court’s decision
The Court found that it was open for the new franchise agreement to be called a renewal of the old franchise agreement because it was largely on the same terms. The changes in the new franchise agreement were as a result of changes in the video rental market. For example, when the franchisee entered into the original franchise agreement, franchisees derived most of their revenue from video rentals, but gradually this changed to the sale of videos, drinks and confectionary.
The Court held that this was not a case where the variations between agreements were so great that the resulting agreement should be regarded as a totally new one nor were the new terms unconscionable.
The Court held that the fact that Mr Munchik did not read or sign the new franchise agreement did not mean that the franchisee had not agreed to renew on those terms. The franchisee gave the franchisor notice exercising its option to renew, received the new franchise agreement, said nothing to the franchisor before the expiration of the original franchise agreement to suggest that he had not read it and continued to pay invoices from the franchisor without complaint. Therefore objectively, he was taken to have read and agreed to the new franchise agreement.
The Court ordered the franchisee and Mr Minchuk to pay a total of $138,989 in damages to the franchisor in respect of the revenue lost by the franchisor, plus the franchisor’s legal costs.
Key learnings for franchisors
Franchisees could be found to have constructively read and understood a new franchise agreement if it is in their possession, if they have been given sufficient time to read it and obtain advice on its content, and if they continue to perform as a franchisee past the expiry date of the last franchise agreement. However, franchisors should always insist on their franchisees properly exercising the renewal of the franchise agreement and signing new documents (if applicable).
Simply because a term in a renewal is less advantageous to a franchisee does not mean that it will be construed as unconscionable, as long as changes can be justified, for example, through distinct changes in the market. Variations to an agreement must be so great that it should be regarded as a totally new agreement, rather than the renewal of an old one.
