I imagine this was how Frontline Retail (Frontline) felt when it tried to end its franchise agreement with Aura Enterprises (Aura). Instead of letting go, Aura took its battle to the NSW Supreme Court, asking for a binding decision that Frontline was not talking sense, and that their relationship was not really over.
So what happened?
In Frontline Retail v Aura Enterprises,1 Frontline operated an employment recruiting franchise. Aura was Frontline's franchisee in the Sydney metropolitan area pursuant to a franchise agreement.
Frontline sent six letters to Aura asserting various breaches of the franchise agreement. Some of the letters were titled "Notice of Default" and threatened termination of the agreement if breaches were not remedied in accordance with the terms of the letter.
Aura argued that the notices issued by Frontline were not valid and did not effectively terminate the agreement.
Where did Frontline go wrong?
Quite simply, Frontline did not know how to properly end its agreement with Aura. Frontline's franchise agreement was not clear – the Court even described the termination clause as an "omnibus clause", which means it tried to deal with all sorts of different events that weren't always clear, such as events within the termination provisions in the Franchising Code of Conduct (Code). As a result, the termination process was confusing.
What does the Code say?
The Code is a mandatory code of conduct. That means that your termination clause/s must be consistent with the termination provisions in the Code, and your contract must be clear as to what you can do. If your contract is not clear, you will not be able to rely on it, and the terms of the Code will prevail.
The termination provisions in the Code are as follows.
- Regulation 21 – breach. If your franchisee fails to comply with the agreement, then you can cut it loose for breach
- Regulation 22 – no breach and without consent. Your agreement can allow you to terminate without the franchisee's consent, and for any reason. The catch? You must give a longer period of notice
- Regulation 23 – special circumstances. Think of irreparable breaches – this involves conduct or circumstances that do not warrant a remedy, and so you are entitled to terminate immediately and at any time.
What was wrong with Frontline's notices?
Importantly, each termination event warrants a different procedure for termination. Being an "omnibus clause", Frontline did not follow the correct procedure as set out by the Code. The Court held that, of the 2 notices that Frontline intended to rely on, Frontline should have terminated the agreement for breach pursuant to the procedure set out in Regulation 21.
So Frontline should have (1) given Aura reasonable notice of its intention to terminate due to breach, and (2) tell Aura how it could remedy the breach, and (3) allow Aura reasonable time to remedy the breach.
While the majority of Frontline's notices were not found to be defective, where they did fall down was on that first requirement. For starters, some of the conduct alleged did not constitute a breach of any obligation imposed by the contract. But as well as this, Frontline's notice did not sufficiently specify the alleged breach, because it did not identify the obligation that Aura breached.
So while Aura could convince the Court that Frontline had made a mistake in ending their agreement on one ground, their relationship was well and truly over for many other reasons.
What are the requirements of a valid notice?
Your notice must specify the essence of the breach and should be construed fairly in its context. And when in doubt, the Court has suggested applying the reasonable recipient test. That is, "would a reasonable recipient, who has knowledge of the terms of the contract, and taking into account the surrounding circumstances, be able to identify the obligation and the manner in which it is alleged to have been breached?"
A reference to the relevant provision of the franchise agreement may suffice for this purpose. However, and depending on the nature of the conduct, reference to the facts describing how the breach is said to have occurred may sometimes also be necessary.
So what can you learn from Frontline's mistakes?
Is the termination procedure in your agreement clear, and is it consistent with the Code? If it isn't, you should amend your franchise agreement.
The Code tells you the procedure for ending your agreement, and in what circumstances you must apply each procedure. Once your agreement satisfies these requirements, you are free to make the rules.
You can decide what will and won't constitute a breach of your agreement. You can decide the period of time you will give as notice if you choose to terminate without cause and without the franchisee's consent. And you can decide which breaches are intolerable and irreconcilable, and which warrant you to immediately end your agreement.
Once you make the decision that your relationship is over, you want it to be swift and effective. After all, you don't want to prolong a relationship that is as good as dead. And you definitely don’t want them calling you all the time asking "why?".
Footnote
1 Aura Enterprises Pty Ltd v Frontline Retail Pty Ltd (2007) ATPR 42-130 (Aura Enterprises)
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Sydney |
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Arthur Koumoukelis |
t 02 9931 4867 |
e akoumoukelis@nsw.gadens.com.au |
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Anna Fergusson |
t 02 9931 4948 |
e afergusson@nsw.gadens.com.au |
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Melbourne |
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Chris Ludescher |
t 03 9612 8280 |
e cludescher@vic.gadens.com.au |
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
