What remedies are there for breach of a franchise agreement?

The recent decision of the NSW Court of Appeal in BB Australia Pty Ltd v Danset Pty Ltd [2018] NSWCA 101 found that while there had been a clear breach of the franchise agreement, the franchisor had failed to show that loss had been incurred,or that a duty had been breached and thus was unable to obtain payment for the breach.

This decision demonstrates how the circumstances of a case can affect what remedies, if any, are available for a breach of a franchise agreement.

Factual background

In October 2002, BB Australia Pty Ltd (BBA) entered into a 10-year franchise agreement with Danset Pty Ltd (Danset) to operate a Blockbuster video rental business.

Under the terms of the franchise agreement, BBA had the right to purchase the assetsupon termination of the agreement, expiration of the agreement or sale of the business by Danset.

In October 2010,Danset, without the knowledge or consent of BBA, sold the assets of the Blockbuster store to Tresblue Pty Ltd (Tresblue), which operated a Civic video rental business nearbyfor $280,000. Tresbluethen took over the store and began operating it under the Civic brand. As a consequence, BBA terminated the franchise agreement with Danset and brought an action for breach of the franchise agreement and sought an order for damages for the loss it claimed to have suffered.

The issues on appeal

The original decision of the NSW Supreme Court was appealed.

The Court of Appeal was required to determine:

  1. whether BBA had suffered any loss as a result of the sale that was required to be compensated by Danset; and
  2. whetherDansetheld the franchise assets on trust for BBA and thus could be ordered to pay BBA for the breach of its obligations to hold the assets so BBA could choose to exercise its contractual right to purchase the assets.

Was there a loss suffered by BBA on Danset’s sale of the assets?

BBA’s main argument was that as a consequence of Danset’s breach of contract, BBA was unable to exercise its option to purchase the assets of the business and thus suffered a loss because it was unable to subsequently sell them at a profit.

The primary judge found that even if BBA had purchased the assets, there was no evidence that they could be sold at a profit.

There had been a ‘steady and inexorable decline’ in Blockbuster stores in Australia between 2007 and 2016, from 339 to 47.  The court found that there was also no difference between the value of the assets and the price that would have been payable upon exercising the option.

On appeal the Court confirmed that the $280,000 paid for the assets was the fair market value, and that even if BBA had exercised its option, it could not have obtain any profit from a resale as there would not have been a purchaser prepared to pay more to acquire the assets.

The Court concluded that BBA had not shownit had suffered any financial loss from Danset’s breach and therefore was not entitled to an order that Danset pay it damages under contract law.

Were the assetsheld on trust by Danset requiring it to pay BB for any profit it had made or compensation for the sale of the assets?

BBA claimed theassets of the franchise had been held on trust in their favour, and that it was entitled to the remedies of equitable compensation, or an account of profits,as a result of the unauthorised sale of those assets.

A trust is a legal relationship that arises where property is held by one entity for the benefit of another entity. When property is held on trust, it creates a fiduciary relationship between the person who hold the property (the trustee) and the person who is entitled to the benefit (the beneficiary). A relationship of trust carries significant obligations and the Court can award remedies for breach of those obligations.

The primary judge had found that no relationship of trust aroseout of the contractual clause containing the option to purchase the franchisee’s assets.

On appeal BBA argued that the legal owner of property (Danset), subject to a contractual right for purchase of those assets by BBA (the option in the franchise agreement), is trustee of the property for the prospective purchaser (BBA) and subject to fiduciary duties.

This argument however was in direct opposition to a clause in the franchise agreementitself which stated that there was no fiduciary (trust)relationship between BBA and Danset.

The Court held that:

  • it could not infer a relationship of trust between Danset and BBA in circumstances where there is an option to purchase assets. The highest BBA’s interest could be said to be at law was an equitable interest.
  • thisequitable interest did not entitle BBA to an order of specific performance of the option to purchase.The only remedy that could have been available was an injunction to prevent the sale in order to allow BBA to exercise its option. However, the sale had already taken place and therefore no injunction could be awarded.
  • just because BBA had an equitable interest, that didnot mean that it was entitled to an order for equitable compensation or an account of profits. The ‘key’ that unlocks such remedies is a fiduciary (trust) relationship, not a mere equitable interest.
  • As there was no fiduciary (trust) relationship under to the terms of the franchiseagreement, BBA had no entitlement to ask for an order for payment by Danset to it of any amount of money.

The appeal was dismissed with noorders made for the payment to BBA of any money despite the clear breach of the term of the franchise agreement.

Practical implications

This decision reiterates that remedies are dependent on the circumstances of the case.

The remedy of:

  • damages under contract law is entirely dependent on being able to show loss or damage has been suffered; and
  • equitable compensation, or an account for profits, is entirely dependent on being able to establish a fiduciary (trust) relationship.

Even if there is a breach of a franchise agreement, like the one between BBA and Danset, this does not necessarily mean payments of money for the breach will be available to franchisors.

Authors: by Krisha Reddy and Benjamin Caddaye, Law Clerks MST Lawyers and Alicia Hill, Principal, MST Lawyers