The start of the calendar year often presents a good opportunity to take stock of your business arrangements and to reflect on how things can be "done better" in the year ahead. For those involved with franchises, 2012 saw two key decisions which are of relevance to both franchisors and franchisees.
The findings may inform your future business practices and agreement terms. These cases are summarised below.
If you have any questions, or would like any specific advice about your own franchise arrangements, please contact David Thomson or Catherine Miller in our Auckland office (details below).
Wrongful copying of policy and procedure documents
Skids Programme Management Limited v McNeill concerned a dispute between sKids, an after school childcare programme franchisor, and a former franchisee who copied confidential sKids documents.
SKids has a code of conduct and a policy and procedures manual which detail how children are cared for in the sKids programme. Mrs McNeill, a former franchisee, copied large sections of these documents when creating equivalent documents for a new childcare programme. SKids claimed that this copying breached a duty of confidence. The decision provided a helpful summary of how the court will approach situations where franchise documents are copied in an unauthorised manner.
The breach of confidence action is designed to protect confidential information. It is available when a party has shared information in circumstances indicating an obligation of confidence and there has been an unauthorised use of that information. Information must have the necessary "quality of confidence".
The Court of Appeal found that information will have the requisite quality of confidence if it is the product of thought and work. The degree of thought and work invested in creating the relevant material will be assessed. Other considerations include
- If the material is unique or a trade secret
- The material's commercial value
- Whether the person who misused the information has avoided a lot of work which would have been required to create equivalent material
- The extent to which the information's owner considered it to be confidential, and any actions taken to preserve its secrecy
- Any actions the user took which demonstrated that they understood the material is confidential.
This is reassuring for those franchisors who put a lot of time, effort and thought into information and materials relevant to their franchise. Franchisors can further protect themselves and their confidential information by taking steps such as stamping or clearly marking the material as confidential, claiming it as their property, and making it absolutely clear in documentation that it cannot be copied. Charging a documentation fee, as sKids does, further indicates that the material is confidential and has commercial value to the franchisor.
An issue for sKids in arguing this case was that it was difficult to find evidence that the copying caused them actual loss. Accordingly, the High Court could only award $2,000 damages for compensation, this sum being based on the documentation fee. However, the Court of Appeal was willing to rectify this by awarding $20,000 exemplary damages against Mrs McNeill, to recognise the flagrancy of her breach and the fact that she would not suffer other punishment.
While no franchisor wants a former franchisee to copy confidential material, this decision shows that the Courts are willing to find a breach of confidence and to award damages reflecting the gravity of the breach.
Guarantee arrangements following expiry of a franchise agreement
CCNZ Limited v Booth concerned the expiry of guarantee arrangements within a franchise agreement. Mr Booth was the guarantor of his company's obligations under its franchise agreement with Columbus Coffee (CCNZ).
The franchise agreement provided that the parties could renew the agreement following the initial term. However, the expiry date of the initial term came and went, and the parties failed to comply with the renewal provisions. Although the contract was not renewed, CCNZ continued to supply product, and Mr Booth's company continued to take advantage of the franchisor's brand and services until Mr Booth's company eventually became insolvent.
The High Court had to decide whether Mr Booth, as guarantor, was liable for the debts his company incurred after the expiry of the initial term of the agreement.
It was accepted that the guarantee obligations would have extended over the renewed term, if the parties had followed the renewal process specified in the agreement. However, that process was not followed.
The Court found that obligations contained in a guarantee, given for a fixed term agreement, could not extend to any "holding over" period after the expiry of the original contract. It reached this conclusion on the following basis:
- The parties could only have extended the agreement by renewing it in accordance with its terms. As the parties had effectively ignored the deadline for renewal, the agreement was not renewed and must therefore have expired on the expiry date. The conduct of the parties in continuing their obligations under the agreement past the expiry date did not amount to a renewal or a variation by conduct of the term of the agreement. From the court's perspective, this continued performance amounted to a new agreement that came into effect after the expiry of the initial franchise agreement; and
- A guarantee cannot extend to any holding over of an agreement unless there is express wording to that effect within the guarantee.
This decision highlights the need for parties to a franchise agreement, and any guarantor, to take an active interest in the expiry/renewal dates of their agreements. Franchisors would be wise to set reminders for the renewal/expiry dates of all of their agreements. Care should also be taken to include clear wording within franchise agreements to provide a level of protection in the event that renewal processes are not followed.