Tax Preparation Franchise Agreements Not Intended to Last Forever

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

Under Missouri law, the language in two H & R Block tax preparation business franchise agreements did not unequivocally express the parties’ intent for the contracts to last forever, requiring reversal of a ruling by a district court interpreting the agreements to continue in perpetuity and to require cause for termination, the U.S. Court of Appeals in St. Louis has decided. The dispute was remanded for further proceedings.

Specifically, the two agreements contained the following identical duration provision: "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."

Right to Renewal

After giving the franchisee notice of its intention not to renew the agreements, Block filed suit seeking a declaratory judgment that it could terminate the agreements and sought damages and injunctive relief. The district court granted summary judgment in favor of the franchisee, concluding the franchise agreements were enforceable under Missouri law and that Block did not have a right not of nonrenewal.

The district court found that the agreements contained an unequivocal expression of the parties’ intent to enter into a perpetually enforceable contract and certified the issue for interlocutory appeal.

Intent to Create Perpetual Contract?

The franchisee was arguably correct that the practical effect of each agreement would be to create a perpetual contract, the court observed. However, the dispositive issue in this case was not whether the parties created a contract which had the effect of perpetual duration; it was whether the contracts’ language unequivocally expressed the parties’ intent that the agreements be perpetually enforceable. To meet this standard, the duration provision must unequivocally express an intent of the parties to create a perpetual, never-ending franchise agreement.

In order to find an intent that a contract be enforced perpetually, the Missouri Supreme Court set the bar high: there must be an unequivocal expression that the contract last forever. The parties agreed that the only Missouri case where this high hurdle was met analyzed a contract with the word "perpetually" in the agreement, the court noted.

In the absence of any express language of the parties’ intent as to duration, the appellate court disagreed with the district court that an eternally enforceable obligation was otherwise clearly implied. Simply put, no term in the contracts clearly demonstrated that the parties intended for their relationship to continue in perpetuity and the district court erred in reading such an intent into the contracts, the court held.

The decision is H & R Block Tax Services, LLC v. Franklin, CCH Business Franchise Guide ¶14,983.