Relief from forfeiture of a franchise agreement

Many retail operators occupy their shops under a franchise agreement and outlet licence granted to them by the franchisor who holds a head lease of the property.   As it is usually associated with terminated leases, relief from forfeiture is often overlooked by both franchisors and franchisees when a franchise agreement and outlet licence are terminated.

However, in Chaka Holdings Pty Ltd v Sunsim Pty Ltd (1987) 10 BPR 18,171 Young J suggested that relief against forfeiture may be available to revive a terminated contractual licence (see also Voskuilen v Morisset Mega-Market Pty Ltd [2002] NSWSC 63 at [20] and Federal Airports Corporation v Makucha Developments Pty Ltd (1993) 115 ALR 679 at 700).

The franchisee may be able to extend its claim to include reviving the franchise agreement by:

1. arguing that the franchise agreement and the outlet licence are a single transaction;  and/or
2. showing that the franchise agreement in its own right granted property rights to the franchisee, such as a sale to the franchisee of goodwill or a right to use the franchisor’s intellectual property (e.g. in BICC Plc v Burndy Corp [1985] Ch 232 the English Court of Appeal held that relief against forfeiture could extend to rights in a patent).

The franchisee would need to remedy the breaches and show that it is unconscionable for the termination to stand, which introduces a large body of case law.

The circumstances will, obviously, be different in every case.  However, the following are likely to be relevant:

1. the impact of termination on the franchisee;
2. any disproportion between that impact and the impact of the breach on the franchisor (particularly if the breach is relatively trivial);  and
3. any windfall gain to the franchisor.

(See Legione v Hateley (1983) 152 CLR 406 at 449; Stern v McArthur (1988) 165 CLR 489 at 538-539; Chaka Holdings Pty Ltd v Sunsim Pty Ltd (1987) 10 BPR 18,171; Tanwar v Cauchi [2003] 217 CLR 315 at [81]).

Consequently, practitioners acting for franchisors or franchisees when a franchise is being terminated should be aware of this potential remedy.

Sam Hopper & Tessa Hawthorn