Headline Communications Limited v Eircom Retail Limited(1) highlights the necessity for both parties to a franchise agreement to adhere to its terms and to continue to abide by their respective obligations, notwithstanding that the franchisor's policy regarding the future development of the franchise network may have changed.
Headline Communications Limited brought a High Court claim for breach of contract against the franchisor, Eircom Retail Limited. Eircom in turn counter-claimed against Headline for unpaid fees, and insisted that it acted at all times in accordance with the franchise agreement.
Eircom Retail, at the time of initial negotiation of the franchise with Headline, was part of the Telecom Eireann group of companies. Telecom Eireann was a semi-state body which controlled the land line telecommunications industry in Ireland. It also had a mobile phone licence and had a number of outlets around Ireland, called 'telecentres'. These were retail stores where customers could make arrangements in respect of telephone services and could also purchase goods associated with such services.
Eircom Retail was initially set up as a subsidiary company of Telecom Eireann for the purpose of providing franchising services. It was envisaged that the number of telecentre outlets in Ireland would be increased from 18 to about 30, largely by way of franchising, and that some of the existing telecentres would also be franchised. In late 1998 the first telecentre franchise was established, and shortly afterwards a further two stores were franchised.
Following discussions with Eircom Retail, Headline was awarded a franchise in September 1999 and the store started trading in November 1999. However, between 1999 and 2000 a number of important events occurred concerning Eircom Retail, and in particular its parent company. In September 1999 Telecom Eireann became a public limited company under the name Eircom plc. The mobile telephony part of the business was hived off and was ultimately taken over by Vodafone. While none of these events affected the legal position, in that Eircom Retail remained a separate legal entity and was still the franchisor under the franchise agreement, the events did give rise to policy changes which were presumably imposed on Eircom Retail as part of group policy. In particular, in April 2000 it was decided that no further franchise outlets would be established. Accordingly, only four franchises were ever opened.
As is usual in franchise agreements, the Eircom Retail /Headline franchise agreement provided for a manual, and for updates to the manual from time to time. In the franchise agreement Eircom Retail undertook to provide ongoing support to Headline, and the franchise agreement and manual went into some detail as to how this support would be provided. On March 31 2000 Eircom Retail issued an email to each franchisee, to which was attached a four-page document which was to come into effect on April 1 2000. This document covered a range of issues, and although the document did not say so, Justice McCracken found that it represented a total change of policy on the part of Eircom Retail. The effect of the changes was to alter the commission structure which had applied and to eliminate certain network services which had previously been sold through the stores. Headline also asserted that as a result of the policy changes the franchise support office was in fact abolished. Eircom Retail in turn contended that all the assistance was still available, albeit from various personnel within Eircom Retail.
From April 2000 the relationship between the parties began to disintegrate. There was a total breakdown of trust, which ultimately resulted in Eircom Retail formally terminating the franchise agreement in August 2001. The proceedings arose as a consequence.
In relation to the policy changes, McCracken accepted that Eircom Retail was entitled to change its policy in relation to franchising and to decide that no further stores would be franchised. Although Headline had been told before entering into the agreement that between 15 and 20 franchised stores were planned, this was not a term of the agreement. However, the judge felt it was not something he could ignore, as the policy change had commercial consequences for Headline, in that Eircom Retail had been set up for the purpose of administering a considerable number of franchise outlets, not just four. As a consequence of the reorganization, the franchise stores were treated as part of the Eircom Group's general retail outlets, rather than as a separate entity, and Eircom Retail assumed responsibility for all the group's retail stores and not simply those which were operated under a franchise.
In relation to the assertion that the franchise support office had been abolished, McCracken found that a franchise store, operated as a separate business by the franchisee, can give rise to totally different problems from those arising in a store owned and operated by a franchisor itself. While it may have been legitimate to close down the franchise support office if it were replaced by an equivalent office or by an individual dedicated to the franchisees, McCracken was of the view that the result of the closing of the franchise support office and the assimilation of the franchise stores into the general management of the Eircom stores was a breach of the defendant's obligation under the franchise agreement to provide a support service. As a result, there was also a clear breach of the defendant's obligation to maintain and update the manual.
The judge found that the breach of the contract on the part of Eircom Retail could be blamed for some, although not all, of the problems which subsequently emerged. It would have been open to Headline to seek to repudiate the contract at the time, but it chose not to do so.
In considering the nature of the franchise relationship, McCracken stated that it had to be remembered that the relationship between the parties was contractual, evidenced by both the franchise agreement and the manual. He commented that it was an unusual franchise arrangement, in that it related to both the sale of goods by the plaintiff and the supply of services by the defendant.
He went on to say that a franchise in such circumstances is an arrangement whereby the proprietors of an established business, with an established goodwill, contract to permit a third party to have the benefit of that goodwill in the conduct of its own business in return for a payment, frequently calculated on the basis of a percentage of turnover or gross profit. It is essential to the franchisor that the business is carried on under the direction of the franchisor to ensure that standards which have built up the goodwill are maintained, and that as far as possible to the public it appears to be the business of the franchisor. If this is to happen, the franchisor must not only direct how the business is to be carried out, but must also assist the franchisee. This is normally achieved by setting up a detailed management plan covering all aspects of the business to ensure that the franchisee knows exactly what is to be done in any given situation, and by providing speedy advice in any unanticipated circumstances. It is a much closer working relationship than most contractual situations, and falls somewhere between an employer/employee relationship and that of a principal and an independent contractor who has sole control of his own business. It has been said in some cases that it is akin to a partnership and in others that it is similar to an agency. In any case, it requires the close cooperation and mutual trust that is central to those relationships. Unlike a partnership, however, the franchisee carries on its own business.
The situation in the case at hand frequently arises in franchises whereby some outlets of a business are operated by the franchisor and some by the franchisee. McCracken felt that there is an important distinction between the management of these outlets. The franchisor can operate its own outlets as part of its overall business, while the franchisee must operate a single outlet individually. McCracken was of the view that this distinction had become somewhat blurred in the present case.
The judge held that the blame for the ultimate collapse of the business was to be shared between both parties. Eircom Retail was in continuing breach of the franchise agreement by not providing back-up services, while the plaintiff, in the absence of such services, operated the business in a number of ways and in a manner which would not have been permitted under the franchise agreement.
This case demonstrates that entering into a franchise agreement, whether as franchisee or as franchisor, is not to be undertaken lightly. Both parties were reprimanded by the judge for their respective mismanagement and behaviour. The fact that the franchisor's future policy was revised shortly after the completion of the agreement did not entitle it drastically and unilaterally to alter its obligations under the agreement, which was still valid and binding. The case also demonstrates that franchisees must abide by the franchise system and comply with their obligations under the franchise manual and agreement.
For further information on this topic please contact Imelda Reynolds at Beauchamps by telephone (+353 1 4180 600) or by fax (+353 1 4180 699) or by email ([email protected]).
(1) Unreported High Court decision of July 10 2002 by Justice McCracken.