FIDUCIARY DUTIES OF A FRANCHISOR

FIDUCIARY DUTIES OF A FRANCHISOR
By Wim Alberts

In Silent Pond Investments CC v Woolworths (Pty) Ltd and Engen Petroleum Limited, a recent decision of the Durban and Coast Local Division, case number 3487/2007, certain provisions in a "franchising" contract were considered by the court. The implications this decision might have are discussed below.

Facts

In terms of an agreement between Silent Pond and Engen, Silent Pond obtained the right to operate an Engen petroleum station on certain premises. Silent Pond was also required to operate a convenience store from the premises, known as a "Quick Shop". Silent Pond operated the petroleum garage together with the Quick Shop for three years. A tripartite agreement was later entered into between the parties, and Woolworths, in terms of which Silent Pond was authorised to use the Woolworths trade mark in relation to a "mini-market". The transfer of know-how was also regulated. The agreement moreover provided, amongst others, that the mini-market must be managed in accordance with Woolworths’ Code of Business Principles and operating manual. Silent Pond was also required to purchase products only from Woolworths. Various payments had to be made to Woolworths (paragraph 23 of the judgment). It transpired however that Woolworths was in the process of establishing a food retail outlet not more than 200 metres from Silent Pond’s petroleum garage, and the Woolworths selling point established within the Quick Shop.

Decision

Clause 41.4, the relevant part of the agreement that the court, per acting judge Gavin Morley SC, focused on, read as follows:

"In implementation of this agreement, the parties hereto undertake to observe the utmost good faith and they warrant in their dealings with each other that they shall neither do anything nor refrain from doing anything which might prejudice or detract from the rights, assets or interest of the other of them".

Silent Pond alleged that Woolworths was acting in breach of clause 41.4 of the tripartite agreement, alternatively, that Silent Pond was entitled to rely on the tacit term that Woolworths would not take any steps which would adversely affect Silent Pond. Woolworths argued that clause 41.4 merely restates a common law duty to act in good faith. It was said that it would have to be established that the opening of the new store would prevent the performance of the parties under the agreement. Silent Pond in turn adopted the approach that the legal position is that unless otherwise expressly agreed, parties to a contract are not obliged to implement an agreement in good faith. It was submitted that in agreeing to show each other the utmost good faith, the parties in effect assumed a fiduciary duty, by contract.

The court had regard to various decisions of the Supreme Court of Appeal, to the effect that uberrima fides cannot be a basis for setting aside or not enforcing a contract. Accordingly, Woolworths’ contention that clause 41.4 was merely a re-statement of the common law was not accepted. The court found that the parties intended to add more to their agreement than simply a provision that specific rights and obligations in terms of the agreement had to be performed in good faith (paragraph 49). In importing the specific principle of good faith, the parties intended more than a mere debtor-creditor relationship. The implies that they would not act in such a way as to "prejudice" or "detract" from the others’ rights, assets or interests (paragraph 50).

The court said (paragraph 51) that it was not difficult to find an explanation as to why Woolworths would stipulate such a clause. It said the following:

"It must be borne in mind that [Woolworths] was placing what is probably one of its most important assets, if not its most important asset, into the hands of [Silent Pond] to use at the instance of [Engen]. I am speaking of the Woolworths trade marks, trade name, reputation and the Woolworths’ know-how. The clause can perhaps be described as a "catch-all" clause. Although the Tripartite Agreement contains quite strict terms in favour of [Woolworths it] went further to stipulate that [Silent Pond], as its sub-licensee, had to act in good faith in implementing the agreement and also not to do anything that would prejudice [Woolworths’] rights, assets or interests, thus conferring upon [Woolworths] the widest possible protection for the assets that were being placed at the disposal of [Engen and Silent Pond]."

The court said that an example of this would be where conduct of Silent Pond, in operating the Woolworths convenience store, had the tendency to impact negatively on and so prejudice the Woolworths’ intellectual property, but did not constitute breach of a specific term of the tripartite agreement. In such a case, Woolworths could still act to protect its valuable intellectual proprietary interests. It is clear that they did not intend the relationship to be a partnership, nor did they intend their relationship to be one of agency or mandate. The court said that it nevertheless considered itself bound to give the duty of good faith, in the implementation of the tripartite agreement, some meaning. The court then made reference to the interpretation of the fiduciary relationship in previous decisions in company law. The court referred to the decision in Robinson v Randfontein Estates Gold Mining Co Ltd where the following was stated:

"Where one man stands to another in a position of confidence involving a duty to protect the interests of that other, he is not allowed to make a secret profit at the other’s expense or place himself in a position where his interests conflict with his duty. The principle underlies an extensive field of legal relationships."

The court’s approach in the Woolworths case is summarised well in its conclusion, in paragraph 57:

"It is correct that the parties did not contract on terms, which conferred upon [Silent Pond] a specific restraint of trade, within a specified area for the duration of the agreement. In my judgment, I do not have to decide this case on the basis of the absence of such a clause. I must consider the conduct of [Woolworths] as against the duties imposed upon it in terms of clause 41.4, and if [Woolworths’] conduct fails to match up to the requirements of clause 41.4, then it follows that [Woolworths] is in breach of that clause and [Silent Pond] is entitled to seek specific performance."

Comments

The court followed a long line of decisions of the Supreme Court of Appeal, to the effect that good faith is not a general requirement for the creation of contractual duties and obligations. However, if parties specifically incorporate this principle, courts will give effect thereto. Practically, this will occur via an analogy with the duty of good faith in fiduciary relationships, which is a well-established norm in our law, particularly in company law. The latter does allow for a remedy even after, for instance, a director has resigned (see for instance Sibex Construction (SA) (Pty) Ltd v Injectaseal CC where it was said that there is no question as to the continuing fiduciary duty of a managing director). In this regard there would thus be a difference between the fiduciary duty in terms of the Woolworths case, and that found in conventional company law disputes. After the "franchisee" relationship established through the contract is terminated, the franchisor will thus be free to compete with his erstwhile franchisee.

WHY FRANCHISEES?

It follows that a potential franchisee should attempt to obtain an undertaking from the franchisor that the franchisee will have exclusive rights in a specific geographical area. However, franchisors could reserve the right to conduct business themselves in that area by way of a non-exclusive licence. The court adopted the approach that the protection of the intellectual property of Woolworths was the basis for the inclusion of the good faith provision. Franchisors would thus in future have to weigh up two factors. On the one hand, the possibility that franchisees will find novel ways to infringe the franchisor’s intellectual property rights, and, specifically, in circumstances falling outside the appropriate contractual stipulations, and traditional grounds of liability. On the other hand, the effect a court could give to a stipulation such as clause 41.4. If the latter is of concern, it could be excluded, together with the inclusion of specific provisions as to exclusivity. However, it can of course not be one-way traffic only, as, at some stage, the proposed franchise could lose its attractiveness to prospective franchisees.