Uncertainty: Does your franchise agreement have an enforceable option or an agreement to agree?
The recent case of Kiraig Pty Ltd as trustee for Jovette Trust & Anor v Rent the Roo Pty LTd & Anor [2017] FFCA 1493 (30 June 2017) (Kiraig) has cast doubt as to the enforceability of a commonly used form of renewal clause.
Kiraig concerned a master franchisee. Its rights to renew for a further term were typical in the franchising space. They required that it must enter into a new master franchise agreement in the form of the Franchisor’s then current master franchise agreement, which would not contain terms “substantially different” to the existing agreement.
However, the Court held that the clause was void for uncertainty and that “what purported to be an option which upon exercise caused a new contract to come into existence, was, in reality, only an agreement to agree…”.
Key factors for finding the clause void included:
- Lack of satisfactory evidence that the documentation issued by the Franchisor represented its then current master franchise agreement;
- Lack of an “agreed mechanism to arbitrate on any differences of view” over what constituted
substantially different terms; and - The fact that the clause required that the new agreement must not be on substantially different terms to both the “essential terms” of the agreement “as well as other, less important, provisions which could be worked out if an agreement existed because essential terms were agreed…”
The decision ultimately left the master franchisee with no business to sell and serves as a timely reminder of the need for careful drafting of renewal provisions and of the importance of obtaining quality legal advice prior to entering into any Franchise Agreement.
If you require advice surrounding Franchising Law, please do not hesitate to contact a member of our Commercial team.
The full case transcript can be found here: Kiraig Pty Ltd as trustee for Jovette Trust & Anor v Rent the Roo Pty LTd & Anor [2017] FFCA 1493
