Unconscionably implementing a strategy – The risk of non-renewal of a franchise agreement

The case of Lindfield NSW Pty Ltd v Netdeen Pty Ltd t/as G.J. Gardner Homes (No 3) (G J Gardner Homes case) is another highly important franchise case that shows the risk of disputes that arise when a franchisor changes a business model or franchise system. In this case the franchisor wished to move from a three-tier to a two-tier structure by implementing a ‘de-mastering’ strategy to terminate or end the master franchise agreements with its master franchisees.  The way the strategy was implemented led to a $20 million judgment in favour of one master franchisee against the franchisor.

Judgment in the case was granted by the Supreme Court of New South Wales on 17 October 2024. This case involved a contractual term that allowed the franchise to not renew the master franchise agreement after the master franchisee gave notice exercising an option for another 10-year term. This term was key to the franchisors ‘de-mastering’ strategy.

It goes without saying that franchisors should take serious notice of this case. The risk of engaging in statutory unconscionable conduct is present when there is a fundamental change to a business model or franchise network structure and when a franchisee or master franchisee seeks to exercise an option.

The decision in this case distinguished the AHG WA (2015) Pty Ltd v Mercedez-Benz Australia Pacific Pty Ltd (Mercedes-Benz case).  If the Mercedez Benz case gave franchisors comfort that they could exercise a power to not renew a franchise without engaging in unconscionable conduct the G J Gardner Homes case shows that there is always a risk, and that each case is decided on its own facts.

The Facts

The master franchisee became a master franchisee of the combined NSW and ACT areas for a G J Gardner Homes in 2005.  On 1 July 2014 the master franchisee and franchisor renewed the franchise for a further 10 years with an option for a further 10 years.

The master franchisee had been successful and had an annual profit of about $4 million.  From 2009 to 2015, the number of sub-franchisees grew from 19 to 26 and turnover of all sub-franchisees increased from over $89 million to over $171 million.

On 3 July 2023 the master franchisee sought to exercise the option for a further 10 years.

On 5 July 2023, the franchisor provided to the master franchisee, a copy of the current master franchise agreement. Any renewal for a further term was to be based on the current version of the master franchise agreement. This version of the franchise agreement was disadvantageous to the master franchisee.

On 24 July 2023, the franchisor issued a refusal notice declining the renewal for a further 10 year term. The refusal notice was delivered pursuant to clause 4.7 of the master franchise agreement. The consequence of the refusal notice was that the master franchisee lost the capacity to derive an income from sub franchisees and sell a realisable asset.

When the 10-year term of the master franchise agreement expired on one July 2024, the master franchise agreement came to an end (as it was not renewed) and was terminated by the franchisor and the agreements between the master franchisee and sub franchisees were transferred to the franchisor.

The master franchisee alleged that it had been pushed out of its master franchise, and it made several claims against the franchisor including breach of contract and unconscionable conduct in contravention of section 21 of the Australian Consumer Law (ACL).

Additional facts relevant to the claim that the franchisor engaged in unconscionable conduct included:

1. From May 2020, The franchisor had an intention to move to model that ‘de-mastered’ or ended all master franchises as part of the franchise network;


2. One example of the disadvantageous nature of the current form of the master franchise agreement is that it required the master franchisee to pay $600,000.00 to the franchisor for the provision of a business development manager even though the salary paid by the franchisor to the business development manager was only $100,000.00. The Court found that an agreement of this nature would be untenable, unworkable and unprofitable. The master franchisee characterised this term as a shifting of profits from the master franchisee to the franchisor.


3. In June 2021, an offer was made by the franchisor to the master franchisee for the payment of $14 million to the master franchisee, in return for the termination of the master franchise agreement;


4. A file note dated 22 February 2022 showed that the franchisor held the view that it had an unfettered right to terminate the master franchise agreement at the end of the current term;


5. The file note was altered at a later date in a manner that was favourable to the franchisor;


6. A report prepared by the franchisee’s chief operating officer (COO Report) was prepared after the master franchisee gave notice of its exercise of the option to renew and was circulated to the franchisor’s board of directors for a meeting held on 20 July 2023 for the purpose of considering the exercise of the option and whether to agree to the renewal for another term;


7. The COO report was sent to solicitors and amended showing the franchisor was acting with the risk of litigation in mind. The amendments removed a phrase that praised the master franchisee and replaced it with a new paragraph that called into question whether the continued presence of the master franchisee was a benefit or detriment to sub-franchisees.

The key issue was whether there was an implied term that the franchisor should consider the interests of the master franchisee when deciding whether to renew the master franchise agreement. The franchisor submitted that clause 4.7 did not oblige it to consider the best interests of the master franchisee.

The court distinguished the facts before it from the facts in the Mercedes-Benz case. In that case, the Federal Court considered a change by the franchise or of its business model which had a negative impact on its dealers. The franchisor decided not to renew dealerships but a key factual difference between the Mercedes Benz case and the GJ Gardner homes case is that the Mercedes Benz dealers did not have an option to renew, while the master franchisee in the GJ Gardner homes case had an option to renew.

The Mercedes-Benz case was important to franchisors and contained findings on which a franchisor may rely when faced with claim against the franchisor for unconscionable conduct concerning a decision to change its business model or to not renew a franchise or a master franchise agreement for another term. The GJ Gardner Homes case however, is a salient reminder of the importance of the franchise's conduct and the representations it makes to franchisees or master franchisees and the risk of being exposed to a successful claim by a franchisee for substantial damages.

Clause 4.7 of the master franchise agreement provided as follows:

(Franchisors rights) Notwithstanding that the master franchisee may be otherwise entitled to exercise the option for renewal, the franchise or may by written notice to the master franchisee within 21 days after receiving a notice on the path 4.3, refuse to renew the master franchise upon grounds, honestly and reasonably held, that renewal of the master franchise would not be in the best interest of the franchisor and other GJ Gardner homes master franchisees and/or sub-franchisees. Without limitation as to other matters that may be reasonably taken into account in determining whether such grounds are reasonable come up regard maybe had to the master franchisees

• percentage of market share to date;


• ability to service franchisees to date;


• demonstrated skill and performance to date;


• to achieve target set out in the development schedule;


• demonstrated support or lack thereof for the franchise or comment its directors and officers, the franchise was business as a whole and the franchise was network

The court was prepared to imply a term that clause 4.7 necessitated the consideration of the best interests of the master franchisee. The court found that the implication of this term was reasonable and equitable. If the best interests of the master franchisee were not considered, whose efforts had been an integral part of the success of the master franchise, it would be inequitable, and the contract would not be effective without the implied term.

In summary, the Court was satisfied that a reasonable businessperson would have understood that clause 4.7 contemplated that a renewal clause required, as a factor to be considered, the interest of the person seeking renewal. To conclude otherwise would completely extinguish the value of an option to renew.

Unconscionable Conduct claim

The key issue was whether clause 4.7 was enforceable in all the circumstances given the conduct of the franchisor, which the master franchisee alleged was unconscionable in contravention of the ACL.

The court found that:

1. There was substance in the master franchisee’s assertion that the COO report and the meeting on 20 July 2023 were an effective cover designed to give an appearance of justification for the refusal to renew the master franchise agreement;

2. The proposed current master franchise agreement was a device to persuade, if not force, the master franchisee to terminate the master franchise agreement;


3. The franchisor had a view that non-renewal of the master franchise agreement would lead to litigation, which gave some weight to the assertion that it wanted to create a picture of compliance with clause 4.7;


4. De-mastering had become a policy of the franchisor from about 2019;

The Court referred to the fact that the claim in the Mercedez-Benz case included a claim for goodwill while the claim in the G J Gardner Homes case was for damages equal to the value of the of the renewal option.  Another critical difference is that in the Mercedez-Benz case the dealers were not exercising an option and Mercedez-Benz was exercising a power not to renew on its own initiative and not refusing an option to renew exercised by the dealers.

The Court held that the requirement to find unconscionability is probably best summarized by the term ‘sharp practice’ or at least very deceptive conduct.

The Court stated that the franchisor had in engaged in sharp practice because:

1. The decision to ‘de-master’ in 2020 could not co-exist with renewal of the master franchise agreement;


2. The franchisor allowed the master franchisee to believe that renewal of the master franchise agreement was a real possibility;


3. The master franchisee continued to work towards renewal believing it was a realistic prospect;


4. The franchisor’s wariness of litigation infected the manipulation of at least one file note and preparation of the COO Report with the franchisor’s lawyers’ amendments to be a justification of the franchisor’s intended position to reject the renewal;


5. Part of the strategy to defeat any entitlement of the master franchisee to renew was providing the master franchisee with a current franchise agreement that was so untenable and unattractive that it would render any renewal unworkable;


6. The franchisor wanted to maximize its profits which was reasonable but what was unreasonable was deceiving the master franchisee into believing that renewal was a real possibility to be decided under clause 4.7;


7. The franchisor did not act in good faith in rejecting the renewal of the master franchise as the rejection was a culmination of a course of conduct to conceal the franchisor’s true intentions from the master franchisee while at the same time allowing the master franchisee to believe renewal was a viable possibility.

1. Although the court’s reasoning was applied to the specific contractual clause before it and the way it was specifically drafted, the reasoning of the Court in the G J Gardner Homes case has a broader application. Franchisor lawyers will need to take great care in the drafting of a clause giving the franchisor the power not to renew the franchise agreement despite the exercise of an option by a franchisee. They will need to draft the clause in a manner that minimises the risk of the implication by the Court of a term that the franchisor must consider the interests of franchisees when exercising the power not to renew a franchise agreement.


2. Franchisors and their lawyers should take not to assume they have an unfettered right to terminate a franchise agreement or master franchise agreement at the end of a term and refuse the exercise of an option to renew.


3. Franchisee or master franchisee lawyers when advising before a franchise agreement or master franchise agreement is signed should carefully review a clause giving the franchisor a non-renewal power and advise the franchisee or master franchisee of the risk of non-renewal when an option is not exercised.


4. In respect of a damages claim, a clause providing that the franchisee will receive no compensation for goodwill at the end of the franchise is not a panacea. The court may award damages based on the loss of the value of the option to renew which is equal to the value of the future business lost. Franchisors and their lawyers need to be aware of the risk of damages of this nature if franchisors act unconscionably when exercising a power not to renew a franchise.

NSWSC 1305.  See our article “A Change of Model is not always a Model of Change” in Australian Franchise Directory 2024, pages 31-33.

Bill Morgan has over 25 years of experience in Commercial Litigation and Dispute Resolution with a focus  on the franchise sector. He is a nationally accredited mediator and is a panel member of the Australian Small Business and Family Enterprise Ombudsman.