In the recent case of SPAR Licensing Pty Ltd v MIS Queensland Pty Ltd (No 1) [2011] FCA 1054 the Federal Court considered what happens when a franchisee terminates a franchise agreement where they have no right to do so under the franchise agreement. The decision indicated that the Courts may be willing to prevent wrongful termination of franchise agreements where there is no express right for the franchisee to terminate and where a franchisor may suffer immeasurable damages from the loss of the franchisee.

In particular, the Court considered whether a franchisor can restrain the franchisee from terminating the agreement and commencing with a competitor of the franchisor.

Background

SPAR Licensing Pty Ltd and SPAR Australia Limited (franchisor) were wholesale suppliers of groceries to the ‘cut-price’ supermarket market. MIS Queensland Pty Ltd (franchisee) operated a cut-price supermarket as a SPAR franchisee. The franchise agreement between the parties obliged the franchisee to acquire its wholesale groceries from the franchisor.  On 19 August 2011, the franchisee wrote to the franchisor purporting to terminate the franchise agreement.

The franchisor commenced proceedings in the Federal Court to prevent the franchisee from:

  1. terminating its existing franchise agreement with the franchisor; and
  2. commencing a new franchise agreement with Metcash, a direct competitor of the franchisor.

Wrongful termination

The franchisor claimed that the franchisee had no right to terminate the franchise agreement and should be restrained from doing so. The termination clauses in the franchise agreement allowed the franchisor to terminate the franchise agreement but did not confer any rights of termination on the franchisee.  This meant that the franchisee had no entitlement to terminate unless the franchisor repudiated the franchise agreement or breached one of its conditions (neither of which were found to have occurred). 

To succeed in preventing the franchisee from terminating the agreement, the franchisor needed to demonstrate to the Court that without an injunction, it would suffer injury for which damages would not be adequate compensation. The Court heard evidence that the closure of the particular the store would present great difficulties for the franchisor. 

Exclusive supplier

The franchisor also sought orders requiring the franchisee to resume sourcing its products exclusively from the franchisor as provided in the franchise agreement.

The franchisee argued that the clause of the franchise agreement as it was drafted, only required the franchisee to purchase goods from the franchisor whilst it was conducting the franchise. The franchisee submitted that given it was no longer conducting the franchise, it was no longer required to purchase its goods from the franchisor. 

The Court’s decision

The Court decided that, in a market substantially controlled by Metcash, if the franchisor’s fourth largest store was to defect to Metcash, this would be a significant commercial event which would considerably affect the ability of the franchisor to find and retain franchisees. The Court considered that allowing this to occur would cause significant damage to the entire SPAR brand, which could not be compensated by damages.

The Court found that the franchisee’s interpretation of the exclusive supplier clause in the franchise agreement would allow it to evade the clause by breaching its obligation under the agreement to conduct the franchise. The Court ruled that this interpretation would contradict the fundamental contractual principle that a contract must not be construed so as to permit a party to benefit from its own wrongdoing or to deprive the other party of the benefit of the contract through its conduct.

The Court granted an injunction restraining the franchisee from terminating the franchise agreement and requiring it to continue purchase its products from the franchisor.

Key learnings for franchisors

The Courts may be willing to grant injunctions preventing wrongful termination by a franchisee where there is no express right for the franchisee to terminate in the franchise agreement (provided the franchisor has not repudiated or breached the franchise agreement).

However, the Court emphasised that the injunction was granted due to the unique factual scenario, in that the potential damage to the franchisor was so severe that it could not be remedied by damages. The Court’s decision may have been different in other circumstances.