A recent decision of the English High Court in the case of MMP v Antal(1)  is significant for both franchisors and franchisees. Franchisors should review their franchise agreements in light of it, to ensure that they contain a clause that allows for termination of the franchise in anticipation of the franchisee causing damage to the goodwill and reputation of the franchise. It also serves as a warning to franchisees that the actions of their employees may be attributable to the franchise, which can have significant consequences for the franchise if the employee breaches a term of the franchise agreement. Finally, the decision clarifies the appropriate measure for damages in a breach of contract case.

Facts

MMP entered into a franchise agreement (the “Agreement”) with Antal London (“Antal”), an international recruitment agency, for a term of 15 years. The Agreement lasted five years, until Antal received a complaint from a client of MMP, who alleged was being harassed by an employee of MMP. Antal terminated the Agreement on the grounds that the actions of the employee amounted to a breach a “substantial term” of the Agreement, namely clause 16.2(1), which prohibits the franchisee from doing anything to “affect adversely [Antal’s] name, Trade Marks or other Intellectual Property.” MMP sued for damages, claiming that the actions of its employee did not breach clause 16.2(1), and that the termination of the Agreement by Antal was a renunciatory breach of the Agreement.

Issues

  1. Were the actions of the employee attributable to MMP, and if so, did they amount to a breach of clause 16.2(1)?
  2. If not, and Antal had wrongfully terminated the Agreement, what is the correct measure of damages owing to MMP?

Did the conduct of the employee amount to a breach of clause 16.2(1)?

The Court held that the conduct of the employee was attributable to MMP. The client was not complaining about private actions of a woman he had independently met, but rather about the actions of a recruitment consultant whom he had engaged, who was misusing the information on his CV for improper purposes: he was “deluged…with text messages… she would also ring him up and then hang up. She sent a letter to him care of his parents.” Flaux J was satisfied that this would have amounted to a breach of her contract of employment, and that she was not on a “frolic of her own.”

The Court then considered whether the harassment of the client amounted to a breach of the Agreement by MPP.

Antal claimed that the conduct of MMP’s employee adversely affected Antal’s “name”, which is synonymous with its brand. MMP argued that “name” should be construed in the “narrow intellectual property sense” and that it cannot be equivalent to reputation. Fluax J preferred Antal’s interpretation of “name”, and held that Antal’s brand and goodwill came within the meaning of “name” for the purposes of clause 16.2(1). Therefore, any action by MMP which actually affected the brand and goodwill of Antal would be a repudiatory breach of clause 16.2(1), and Antal would be entitled to terminate the Agreement.

However, Antal failed to prove a breach on the facts, as no evidence was offered that its brand or goodwill had actually been harmed in any way. Flaux J accepted that the management of Antal had a genuine fear that the conduct of MMP’s employee would damage its brand, however, on a true construction of clause 16.2(1), this fear alone was not sufficient to terminate the Agreement: actual evidence was required.

As such, Antal’s termination of the Agreement was wrongful and a renunciatory breach of the Agreement.

What is the correct measure of damages?

Flaux J then considered the issue of damages arising out of Antal’s breach of the Agreement. The general rule is that the measure of damages should reflect the amount required to place MMP in the position that it would have been in if the Agreement had not been breached. According to Antal, this was the appropriate measure of damages, and was described by Flaux J as the “normal way” to measure damages, from which he would be reluctant to depart.

MMP proposed an alternative approach to the measure of damages. It argued that since the value of the company after the breach was allegedly nil, then it was appropriate to place a value on the company before the Agreement was breached, and use this figure as the measure of damages. Flaux J called this “the fall back position” to be used only where the “normal way” was inappropriate, ie where the company was put out of business due to the breach. This was not the case here, as MMP continued to trade, albeit poorly, after the Agreement was terminated. Further, Flaux J had “two fundamental objections” to MMP’s proposed method of measuring damages:

  1. it was based on a “hypothesis upon a hypothesis,” ie the hypothetical value of the MMP prior to the termination, on the hypothesis that it had ceased doing business on that date, and
  2. it failed to take account of the fact that MMP was continuing to do business despite the breach and could continue to make a profit.

Since Flaux J had warned the plaintiff during the trial that its case would “stand or fall on whether the  valuation of the business at the date of the breach was the correct measure of damages” and that there would be “no scope for substituting some alternative measure for loss of profits” it followed that MMP’s claim for damages therefore failed. Even if the judge did accept it as the correct measure of damages, the valuation given to the business by the plaintiff at the time of the breach was “hopelessly speculative and over-inflated.”

Lessons Learned

In light of this case, franchisors should ensure that clauses in franchise agreements designed to protect the reputation and brand of the franchise are sufficiently flexible, so to enable the franchisor to terminate the agreement if they have a reasonable belief that its reputation or brand is being damaged. The clause in Antal was weighted in favour of the franchisee, requiring actual reputational damage to have occurred. This may be difficult to prove, and requires the franchisor to wait for any such damage to occur before terminating the agreement, in which case the damage will already have been done. Franchisors should also be wary of improperly terminating franchise agreements, which may result in them having to pay substantial damages  to franchisees (assuming the franchisee pleads the correct measure of damages, unlike Antal).

Franchisees should take note that the inappropriate conduct of their employees could imperil their franchise. Procedures should be put in place, in so far as is possible, to ensure that the personal data of customers is securely stored and is not abused in any way by employees.