The Body Shop’s recent failure to successfully terminate a long-term franchise agreement has important practical consequences for similar contractual arrangements

In this article, we look at the High Court’s findings in the recent case of The Burke Partnership -v- The Body Shop International Limited and its implications for franchisors with existing or proposed long-term contracts with their franchisees.

The background and the dispute

In 1980 and 1981, Body Shop International as franchisor (“Body Shop”) and the Burke Partnership (the “Franchisee”) entered into two franchise agreements to operate Body Shop retail outlets in two small territories in Norfolk and Cambridge (“the Agreements”).

Both Agreements had a five-year initial term, capable of being renewed by the Franchisee provided (1) certain conditions were met (the “Conditions”); and (2) the Franchisee gave three months prior notice to extend before the current term of the Agreements expired.

Both Agreements were renewed by the Franchisee multiple times over more than 35 years. Each time, Body Shop accepted the Franchisee’s notice to renew. In 2020 and 2021, Body Shop served notices to terminate both Agreements on what the Body Shop stated to be a reasonable period of three years. Body Shop’s motive – though it did not form part of the Court’s decision – was that the three retail outlets operated by the Franchisee across two relatively small urban territories did not match Body Shop’s business practices 35 years after the Agreements were first signed, and negotiations to resolve the situation were unsuccessful.

The Agreements contained no express right for Body Shop to terminate for convenience, and it was common ground that the Franchisee had not breached the Agreements such as to give Body Shop a right to terminate for cause.

The Franchisee denied that Body Shop had any right to terminate the Agreements on reasonable notice, primarily on the ground that there was no express right for Body Shop to terminate for convenience and that there was no justification for English law to imply a right to terminate on reasonable notice into the Agreements. The Franchisee then commenced proceedings against Body Shop in the High Court, seeking declarations that the notices to terminate issued by Body Shop were invalid and the Agreements remained in force.

A major hurdle faced by Body Shop was to persuade the Court that the renewal clause in the Agreements (exercisable every five years provided the Conditions were met) did not apply for successive renewals. In other words, that it was a renewal right exercisable only once. That formed a core part of Body Shop’s argument on whether the Agreements should be read as being perpetual, which would be relevant to whether a right to terminate for convenience on reasonable notice can be implied. This is an argument which we frequently see in practice.

The High Court’s decision

The Judge ruled in the Franchisee’s favour, by finding that Body Shop had no right to terminate for convenience on reasonable notice, and that the Agreements remained in force.

An argument run by Body Shop but decisively rejected by the Judge was that the Agreements could not have been intended to be (or in law permitted to) run for perpetuity. The Franchisee argued that the Parties could never have intended in 1980/1981 that their franchise relationship would last for ever. This is an argument that we often see used, where contracting parties have continued to perform their contracts beyond a fixed term and then seek to end the relationship by serving a notice to terminate on reasonable notice. The Judge conclusively rejected it, by finding (1) that this was not in reality a perpetual contact that could be renewed at the Franchisee’s option indefinitely, because the Franchisee had to fulfil the Conditions as a pre-condition to Body Shop being required to grant a renewal; and (2) more importantly, the Agreements already provided explicitly for termination rights and to imply additional termination rights would cut across those explicit terms. In deciding (2), the Judge was bound by case law holding that terms cannot be implied where this would contradict explicit terms agreed by the Parties, and that a clear unilateral renewal right for the Franchisee which could not be refused by Body Shop was such an express term. In short, Body Shop was held to the express terms which it had agreed.

Another argument rejected by the Judge was that the option for the Franchisee to renew multiple times created a commercially disadvantageous position for Body Shop. The Judge gave no weight to that argument, finding that it had no bearing on whether to imply any terms.

Key takeaways for franchisors

The Court rejected many of the arguments often run by franchisors when they wish to escape long-term agreements where they do not have express rights to terminate for convenience.
This case also illustrates that some franchisees do have the appetite for commercial litigation in disputes with franchisors, particularly in disputes over termination where the franchisees’ rights to operate their business is in jeopardy. We do not know yet whether the High Court’s decision may be appealed by Body Shop to the Court of Appeal, which remains a possibility.

We see at least the following four key takeaways for franchisors from the Body Shop judgment:

1. Do not assume that you can terminate for reasonable notice: It is often assumed that a long-term (five, 10, 15+ year contract) must be terminable on reasonable notice, i.e. that there must be a get-out right for either party if the relationship does not go to plan. This judgment confirms that this is a dangerous assumption to make, and that if a franchise contract contains express rights to terminate for cause, that is a very high bar to reach.
   
   
2. Be explicit about the number of times that the contract can be renewed and the conditions attached: Renewal terms that are too general can be interpreted to allow repeated renewals; if you intend an initial term with a single renewal period permitted (absent further agreement) then say so explicitly. Another challenge faced by Body Shop in this case was that the Conditions to be fulfilled by the Franchisee before it could request an extension which Body Shop could not refuse were relatively easy for the Franchisee to fulfil. This case illustrates that a franchisor should not easily rely on a termination on reasonable notice right being implied so as to overcome a unilateral right to renew in favour of the franchisee(s).
   
   
3. Be careful about perpetual roll-over of franchise agreements: It is a very common issue that franchise agreements are allowed to roll-over (including after a fixed term ends) without renegotiation. This judgment highlights the importance of active management of franchise agreements after they have been signed, especially as acting as though a state of affairs exists – such as a unilateral right to extend the term – can make it very difficult for a franchisor to run a reasonable notice termination argument at a later date. Franchisors can mitigate the risks of this – and of being trapped within contracts that are not commercially viable long-term – by actively managing the terms of their franchise agreements and planning in advance for when those agreements will need to be renewed. A court cannot be relied upon to redress the balance in every case.
   
   
4. Carefully consider other options to exit and seek advice on managing that process: Body Shop was in a difficult position because of its contractual position. It sought to give a lengthy period of notice to terminate (some three years) but still was not able to exit successfully. Sometimes, such obstacles can be overcome with prior planning, and we often advise franchisors in developing exit strategies to minimise their risk.

Please do get in touch with the authors of this article if you would like to discuss franchise contract management or exit strategies from difficult franchisee relationships.

With thanks to Chibu Akpakwu for his help in drafting this article.