Antiquated Contracts and Commercial Coherence - High Court Ruling

Where commercial agreements have been operating for many years, one party or another may well feel that they have become hopelessly out of date and unfit for purpose. However, as a High Court ruling showed, even very old bargains will be upheld if they are clearly worded and continue to make coherent business sense.

In the early 1980s, a partnership entered into franchising agreements whereby it was granted exclusive rights, in certain parts of the UK, to operate retail outlets bearing a company's name and to sell the company's products. It launched proceedings after a dispute arose concerning its entitlement to extend those agreements.

The partnership argued that, subject to certain conditions, it had a contractual right to require extension of the agreements for ongoing five-year periods. Such extensions had been regularly granted for almost 40 years. The company, however, asserted that the agreements permitted only one five-year extension and that it was entitled to terminate them on giving reasonable notice. The antiquated agreements would, it argued, otherwise be extendable by the partnership in perpetuity.

The Court acknowledged that, when the agreements were signed, franchising was a business model in its infancy. Neither the partnership nor the company had much experience in the field and they did not consider how their arrangements might develop. A franchising deal struck today might well look very different.

Preferring the partnership's interpretation of the agreements, the Court found that, on their natural and ordinary meaning, they conferred on the partnership a right to give at least three months' written notice to the company requiring the grant of further five-year extensions, provided that it had to date complied with all its other obligations under the agreements. Extensions could be refused if those conditions were not met and the agreements were not themselves perpetual in that they lasted for five-year terms which the partnership might seek to extend.

The Court noted that, even if the agreements could be viewed as out of date or no longer fit for purpose, that was no reason to reject the natural meaning of the words used. They continued to be commercially coherent and it was clearly intended at the time that the partnership would be able to seek their repeated extension. Even if their terms might now appear imprudent or commercially disadvantageous from the company's point of view, that did not absolve it from the bargain it had made. To rule otherwise would be to construe the agreements with hindsight.