You’re a franchisor and the term of your franchise agreement is five years, but you can terminate it early for cause. The term and termination provision also auto-renews. Do you have the right to elect not to renew the agreement at the end of the initial term or a renewal term? Or are you on the hook for ever if the franchisee doesn’t give you an out by materially breaching the agreement?
To help you analyze the issue, here’s the first part of the term and termination provision: “The initial term of this Agreement shall begin on the date hereof and, unless sooner terminated by [the franchisor for cause] as provided in paragraph 6, shall end five years after such date, and shall automatically renew itself for successive five-year terms thereafter (the ‘renewal terms’).”
I’d say that the franchisor has the right to elect not to renew the agreement. I’d say that the franchisor also has the right to terminate early if the franchisee materially breaches. Of course, the franchisor would have to give plenty of notice if it elected non-renewal, both because it’s required to act reasonably and because courts and legislatures are solicitous of franchisees. But termination by non-renewal seems to be a no-brainer to me.
Would your answer change if the same term and termination clause contained a proviso that allowed the franchisee to terminate the agreement at the end of the initial term or a renewal term? Here’s the language from the contract: “provided, that Franchisee may terminate this Agreement effective at the end of the initial term or any renewal term upon at least 120 days written notice to Block prior to the end of the initial term or renewal term, as the case may be.”
If you answered that the franchisor isn’t on the hook for ever, you have the backing of the Eighth Circuit, but the dissenting judge and the U.S. District Court for the Western District of Missouri would beg to differ.
The term and termination clause
Putting it all together, here’s the term and termination provision in H & R Block Tax Services LLC v. Franklin, a recent Eighth Circuit case:
The initial term of this Agreement shall begin on the date hereof and, unless sooner terminated by Block [for cause] as provided in paragraph 6, shall end five years after such date, and shall automatically renew itself for successive five-year terms thereafter (the “renewal terms”); provided, that Franchisee may terminate this Agreement effective at the end of the initial term or any renewal term upon at least 120 days written notice to Block prior to the end of the initial term or renewal term, as the case may be.
Perpetual agreements don’t get a lotta love
To analyze the issue, you have to keep in mind that courts don’t exactly love perpetual agreements. According to the District Court, “Missouri courts generally do not favor perpetual contracts. However, they will enforce perpetual contracts where the terms of the contract expressly state or clearly implicate that the parties intended the contract to be perpetual.” [citations omitted]
The Eighth Circuit expanded on this rule in its opinion:
Missouri courts are prone to hold against the theory that a contract confers a perpetuity of right or imposes a perpetuity of obligation. The [Missouri] Supreme Court has made clear that, to be enforceable, a contract which purports to run in perpetuity must be adamantly clear that this is the parties’ intent. Missouri courts will only construe a contract to impose an obligation in perpetuity when the language of the agreement compels that construction, such that the parties’ intention that the contract’s duration is for life … is clearly expressed in unequivocal terms. [citations and internal quotations omitted]
Drafting and interpreting term and termination provisions
So does the term and termination clause in H & R Block compel the construction that the parties intended a perpetual agreement? Is it “adamantly clear”?
Having recently re-read Ken Adams’s Manual of Style for Contract Drafting, I can hear Ken’s criticism of the provision: “shall”? “hereof”? “such date”? “provided”? All sub-optimal. Plus, the language is just plain confusing. If the drafter intended for the agreement to be perpetual, he — or she — should have stated that clearly. If the agreement wasn’t meant to be perpetual, the drafter muddied the waters by mashing up the franchisor’s right to terminate for cause with the franchisee’s right of non-renewal by use of a proviso.
The language giving the franchisee the right not to renew the agreement by providing 120 days’ notice creates confusion. Does it imply that the franchisor doesn’t have that right? The natural reading of the clause absent the proviso would be that the franchisor could elect not to renew the agreement. But if that right were implied, wouldn’t the proviso be meaningless, thus implying that the franchisor didn’t in fact have a right to elect non-renewal?
Either way, the language is confusing, and the parties needed a court to resolve the conflict.
I think the Eighth Circuit got it right. What do you think?