Legal Article

A Landmark Decision - Dymocks and Todd

This is an important, recent case on franchising. It involves the well known Australian retail book-selling franchise, Dymocks, and some of its franchisees in New Zealand.

Although the case was heard by the Courts in New Zealand and ultimately, by the Privy Council in the United Kingdom (on appeal), it was based on New South Wales law. This is because the franchise agreements stated that they were governed by the law of New South Wales. Legal experts from New South Wales had to be flown to New Zealand to give advice about New South Wales law.

The single Judge of the High Court of New Zealand who heard the case initially found in favour of Dymocks. Dymocks had instantly brought to an end 3 franchise agreements in New Zealand. There had been a significant prior dispute between Dymocks and the relevant franchisees. The dispute had come to a head, Dymocks claimed, when the franchisee sent a facsimile to the other New Zealand franchisees containing controversial comments about the future of the Dymocks franchise system in New Zealand.

An appeal was mounted from the single Judge's decision to the Court of Appeal of New Zealand, which reversed the outcome by finding that Dymocks did not have good grounds for instant termination of the agreements. The Court of Appeal found that the franchisees were entitled to recover damages from Dymocks.

A further appeal was brought from this decision to the Privy Council, which again reversed the outcome, finding in favour of Dymocks. The Privy Council's reason for this finding was different to that of the single Judge who heard the case initially, however. The Privy Council found that the franchisees had "repudiated" their agreements. In other words, they had signalled to Dymocks that they would no longer act in compliance with their agreements, and they had in fact already stopped paying franchise fees to Dymocks. Dymocks was then entitled to treat the agreements as being at an end.

From a legal point of view, the case is important for several reasons, some of which are more technical than others. One, perhaps more technical reason (although it also has important practical consequences), is in relation to the question whether there is a general duty on the part of both franchisor and franchisee to act in "good faith" and reasonably under a franchise agreement.

From a practical point of view, one of the points I find most interesting about the case is in relation to clauses dealing with the effects of termination. These clauses, which are commonly found in franchise agreements, often provide that when the franchise agreement comes to an end, the franchisor has the option of buying back the business equipment from the franchisee. Sometimes the clause says that the price is to be the market value of the equipment, and sometimes it says that it will be the written down value as appearing in the franchisee's books of account. The written down value of the business equipment will often be significantly lower than the market value.

All of the Courts which heard the Dymocks case unanimously found that the clause in the Dymocks' franchise agreement, which gave Dymocks the option of purchasing back the equipment for a fair market value, was valid. The comments made by the Courts also suggest, in my view, that such clauses will usually be valid even if they provide for a re-purchase at a written down value.

This finding has much practical significance for franchisees who are contemplating the termination of a franchise agreement, because it considerably affects the amount they stand to recover for their business.