At the end of last year the High Court handed down a judgment in a franchise case involving an estate agency franchisor called Hunters, in respect of a dispute with a regional master franchisee about the regional master franchisee’s failure to achieve the contractual development schedule. As is standard in master franchising and area development franchising, the master franchisee was required to achieve a certain number of franchisees in its allocated territory, failing which Hunters had certain rights. The central issue was whether those rights would simply relate to a loss of exclusivity or whether Hunters would also be able to claim damages. The background was that there had been a history of failure to achieve the development schedule by this particular master franchisee and extensive discussions had previously taken place. The master franchisee argued that Hunters would be able to ensure a failure to achieve the development schedule by simply refusing to allow the master franchisee to grant a franchise to a particular franchisee and indeed, the master franchisee argued that that is exactly what had happened in this case.
The court had first to decide the extent to which a duty of good faith applied to prevent Hunters from refusing approval of a franchisee. The judge concluded that the implication of a duty of good faith was not relevant here and instead clauses 10 and 12 had to be analysed using the Braganza principle, which, in summary arises when an agreement gives one party a discretion and provides that there are limits to the way that that party can exercise that discretion – it has to be exercised honestly, rationally and for the purpose for which it was conferred. Secondly, the case looked at the principles of contractual interpretation to establish whether the franchisor could claim that the master franchisee had lost not only exclusivity but also claim damages if the development schedule was not achieved. Those principles are set out below:-
The English Courts’ approach to contractual interpretation can be summarised as follows:-
i) The court construes the relevant words of a contract in its documentary, factual and commercial context, assessed in the light of (a) the natural and ordinary meaning of the provision being construed, (b) any other relevant provisions of the contract being construed, (c) the overall purpose of the provision being construed and the contract in which it is contained, (d) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (e) commercial common sense, but (f) disregarding subjective evidence of any party’s intentions;
ii) A court can only consider facts or circumstances known or reasonably available to both parties that existed at the time that the contract or order was made;
iii) In arriving at the true meaning and effect of a contract, the departure point in most cases will be the language used by the parties because (a) the parties have control over the language they use in a contract; and (b) the parties must have been specifically focusing on the issue covered by the disputed clause or clauses when agreeing the wording of that provision;
iv) Where the parties have used unambiguous language, the court must apply it;
v) Where the language used by the parties is unclear the court can properly depart from its natural meaning where the context suggests that an alternative meaning more accurately reflects what a reasonable person with the parties’ actual and presumed knowledge would conclude the parties had meant by the language they used but that does not justify the court searching for drafting infelicities in order to facilitate a departure from the natural meaning of the language used;
vi) If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other but commercial common sense is relevant only to the extent of how matters would have been perceived by reasonable people in the position of the parties, as at the date that the contract was made;
vii) In striking a balance between the indications given by the language and those arising contextually, the court must consider the quality of drafting of the clause and the agreement in which it appears. Sophisticated, complex agreements drafted by skilled professionals are likely to be interpreted principally by textual analysis unless a provision lacks clarity or is apparently illogical or incoherent;
viii) A court should not reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight, because it is not the function of a court when interpreting an agreement to relieve a party from a bad bargain;
ix) In construing a contract, the court cannot take into account the parties’ negotiations for the purpose of drawing inferences about what the contract means;
x) It is open to parties to a contract to exclude by express agreement a remedy for its breach which would otherwise arise by operation of law. But in construing such a contract one starts with the presumption that neither party intends to abandon any remedies for a breach, and clear express words must be used in order to rebut this presumption.
John Pratt, IDI Country Expert for franchising in UK
