When Is A Franchisor Unreasonable To Withhold Consent Under A Franchise Agreement?

It is common for certain rights of a franchisee under a franchise agreement to be exercisable only if the franchisor gives its consent, such consent "not to be unreasonably withheld". Examples of such rights might be in relation to the change of a key person; change of the franchisee's trading location; change in the franchisee's corporate structure; or a sale or assignment of the franchisee's business.

Historically, there has been little guidance from the English courts as to what constitutes unreasonable withholding of consent in a franchise agreement (or indeed in any commercial contract). However, in the case of Porton Technology Funds and others v 3M UK Holdings Limited and another EWHC 2895 the High Court confirmed that the principles developed in landlord and tenant disputes concerning this phrase should be applied in commercial cases and therefore will equally apply to franchise agreements.

What are the relevant principles?

Following the Porton case, the principles which the court will apply in assessing whether a franchisor has been unreasonable to withhold consent under a franchise agreement are:

the franchisee will have to show that the franchisor's refusal to give consent was unreasonable. Putting the onus of proof on the franchisee gives the franchisee a large hurdle to overcome at the outset; what is reasonable in each case will depend on the individual facts; a legitimate refusal does not have to be objectively right or justified but it must be based on reasonable commercial grounds; and the franchisor is not obliged to consider the franchisee's interests when making its decision. If the franchisee would suffer disproportionate detriment as a result of the franchisor's refusal the refusal can be deemed to be unreasonable. However, disproportionate...