The recent English High Court decision in MCB Printing and Design Limited v Kall Kwik UK Limited EWHC 624 (QB) establishes the duty of care owed by a franchisor to it’s franchisee and to potential franchisees. The court found that the provision of negligent advice by the franchisor constituted a breach of this duty. The judgment in setting out the extent of a franchisor’s duty should be closely considered by all prudent franchisors to ensure they adequately protect themselves from liability. The case is also very informative from a legal practitioner’s point of view in defining the nature of franchising. Although the comments made by Mr Justice Penry-Davey in this respect were obiter, they are particularly useful in attempting to define the relationship for which there is no single formal legal definition. He summarised the legal relationship as follows:
“Although franchised businesses operate with a large degree of independence, there is as part of the framework the offer of assistance and services to franchisees for the benefit both of franchisee and franchisor. The franchisee has the benefit of the association with a well known name and of access to an established business framework, and the franchisor inevitably benefits from a business run successfully which reflects well on its brand name.”
The basis of the franchisee’s claim
There are two main heads of claim in this case, identified as the premises claim and the marketing claim. The premises claim concerned the negligent advice given by the defendant franchisor on the cost of refitting the premises to the franchisor's mandatory requirements. The marketing claim was based on the defendant’s failure to provide the level and quality of marketing advice and support agreed by the parties. Applying the general principles of the tort of negligence regarding the imposition of a duty of care, the judge found the defendant franchisor liable on both counts.
The claimant, Michael Bibby was considering buying an existing franchise business as a going concern and sought advice from the defendant franchisor on the cost of refitting the premises to the franchisor's mandatory requirements. The defendant advised first that the cost of refitting was £10,000 and later that it would be no more than £15,000. It transpired after the acquisition that these costs were significantly lower than the true cost of the refitting works (between £30,000 and £45,000), and the franchisee successfully claimed that had it known the true costs, it would have either negotiated a reduction of the purchase price of the existing franchise business with the vendor or withdrawn from the acquisition altogether. The judge considered the advice to be negligent on the basis the estimate was provided absent the expertise of the franchisor’s own preferred supplier who subsequently supplied the accurate estimate. Further the judge considered that it was foreseeable that negligent advice could cause damage.
As noted above, the claimant’s second head of claim related to the defendant’s failure to comply with the agreed marketing procedures. On 4 November, 2007 the claimant entered into an agreement with the defendant called the marketing launch plan agreement. The agreement provided for the creation of a data base of contacts which would enable the defendants to implement a programme of intensive centralised marketing. It also required the defendant to issue a press release concerning the franchisee’s business.
The agreement made provision for the use of a system known as Marlin which was supplied by the defendant as part of its standard equipment package on the basis that the defendant would train the franchisee and its staff to use it.
Mr Justice Penry-Davey held that the defendant was in breach of its contractual obligation arising out of the marketing launch plan agreement to complete the installation on Marlin of the vendor's customer data supplied to the defendant, which included the data relating to the top 200 clients. He also found that the defendant failed to adequately comply with it’s obligations under the franchise agreement to provide the claimant from time to time with advice, know how and guidance in such areas as management finance marketing and methods of operation to be employed in or about the Kall Kwik business.
This decision provides useful confirmation that a franchisor may owe a duty of care in tort to franchisees and potential franchisees. The court held that the defendant’s inadequate assessment of refitting costs was in breach of it’s duty of care to the claimant despite the fact the claimant was not yet it’s franchisee. The decision, particularly the obiter comments on the nature of franchising provides useful guidance to franchisors and franchisees on the legal rights and responsibilities created by a franchise agreement.