Delahunt v Swim Loops [2018] VSC 269 – exercise caution when terminating franchise agreements

This decision of the Victorian Supreme Court illustrates that the “devil is in the detail” when issuing Notices under franchise agreements and serves as a timely reminder of the parties’ overarching obligation to act in good faith.

In Delahunt v Swim Loops [2018] VSC 269, the franchisees obtained an interlocutory injunction allowing them to take back control of their franchised business following a purported termination of the franchise agreement by the franchisor.

The franchisor had issued a Notice to Remedy Breach (Notice) requiring payment of outstanding royalties and advertising fees. However:

• The monetary amount demanded in the Notice was incorrect; and
• The covering letter enclosing the Notice specified a period of 21 days to rectify the breach, whereas the Notice specified 28 days.

On the last day of the Notice period, the franchisees’ solicitor wrote to the franchisor requesting an extension of time to obtain instructions and respond to the Notice as the solicitor had been hospitalised for two weeks. Five days later, the franchisees via their solicitor offered to make immediate payment to the franchisor to remedy the breaches the subject of the Notice. The franchisor rejected the solicitor’s request and ignored the franchisee’s offer. The franchisor issued a Notice of Termination by email, changed the locks at the business premises and took control of the franchised business.

The franchisees’ application

The franchisees brought an urgent application in the Supreme Court of Victoria seeking, among other things, orders that the franchisor:

• Be restrained from treating the franchise agreement as terminated;
• Cease conducting the franchisees’ business; and
• Hand back possession of the premises.

The franchisees’ primary argument was that the franchisor had breached its obligation to act in good faith under section 6 of the Franchising Code of Conduct (the Code) by refusing to grant an extension of time to comply with the Notice, as well as purporting to terminate the franchise agreement the day after the franchisees offered to make payment of the sum demanded in the Notice.

The franchisor’s argument

The franchisor argued that the termination was effective because the Notice was ‘materially correct’ and that the franchisees caused an unreasonable delay by waiting until the expiry of the Notice to seek an extension.

The Court’s decision

The Court found in favour of the franchisees, permitting the franchisees to re-enter the premises and resume their business pending the final determination of the dispute.
In granting the interlocutory injunction Justice Digby held that:

• It was arguable that the franchisor’s termination of the franchise agreement was ineffective. The amount stated in the Notice was incorrect and in the circumstances, the franchisor may have  failed to provide the franchisees with a reasonable time to remedy the breach; and
• It was likely that the franchisor contravened the obligation of good faith in purporting to terminate the franchise agreement. The franchisor was aware that the franchisees disputed the amount claimed in the Notice and had asserted a right to set off, had requested an extension of time to seek legal advice in relation to the Notice, and offered to cure the breach, but still took steps to terminate.

Takeaway points

This case is a timely reminder of the importance of getting the factual details absolutely correct when issuing notices under franchise agreements, particularly a notice which may be relied upon to exercise a right of termination.

The decision also shows that prior to terminating a franchise agreement, a franchisor must carefully consider its good faith obligation under section 6 of the Code, having regard to the particular circumstances and events prior to and after issuing any breach notice. The case also demonstrates that changing locks and taking possession of premises can easily be undone by the Court.

This article was written by Melissa Hanbidge, Partner, Sean O’Donnell, Partner and Lee Deutzmann, Solicitor.