A chink in the armour of the Franchisor?
Geoffrey Sturgess - Partner, Blake Lapthorn Solicitors
Franchising is largely a non-regulated activity in the UK and new franchisees are not protected by consumer law. As a result, UK franchisors armed with ‘standard’ franchise contracts including single agreement and no reliance clauses have hitherto enjoyed an almost ‘untouchable’ status.
Unsettling for franchisors is the glimmer of hope offered to franchisees in Mr Justice Penry-Davey’s recent decision in the High Court in MGB Printing and Design Ltd v Kall Kwik UK Ltd [2010] EWHC 624.
Although it may be appealed the decision is significant to the industry.
The case concerns Mr Bibby, sole shareholder and franchise principal in MGB, who was advised by Kall Kwik’s head of franchise sales on the likely costs of purchasing an existing franchise and refurbishing the premises to meet Kall Kwik’s contractual standards. Kall Kwik effected an introduction to the existing franchisee and advised Mr Bibby that the refurbishment costs were likely to be £15,000. This sum was included in Kall Kwik’s cash-flow document provided to Mr Bibby, who relied on the estimate in his calculation of the purchase price for the franchise of £160,000.
Kall Kwik had no recent knowledge of the premises having not inspected them during the term of the existing franchise agreement.
Mr Bibby then set up MGB, which entered into a franchise agreement and subsequently a marketing launch agreement with Kall Kwik. Both parties entered into a sale and purchase agreement with the existing franchisee. It later became apparent to MGB that the cost of refurbishing the premises to Kall Kwik’s contractual standards far exceeded the estimation given, being actually in the region of £30,000 to £45,000. Furthermore, Kall Kwik failed to provide marketing materials and training under the terms of the marketing launch agreement.
Michelle Stevens Hoare (instructed by Owen White), acting for MGB, sought damages for the loss suffered by paying too high a purchase price to the existing franchisee and the negligent advice given and breach of contract in relation to the franchise and marketing agreements.
Graham Cunningham (instructed by Hamilton Pratt), acting for Kall Kwik, denied that a duty of care was owed to MGB as the advice given and the cash-flow document were provided to Mr Bibby prior to the incorporation of MGB so could not have given to MGB. Naturally, Kall Kwik also denied negligence and breach of contract.
Kall Kwik’s arguments included reliance on a boilerplate ‘entire agreement’ clause – “don’t rely on anything we tell you before you sign the franchise unless it’s actually written into the franchise agreement itself” which is found in most UK franchise agreements.
Mr Justice Penry-Davey held that Kall Kwik had given negligent advice and had breached the duty of care owed to MGB. Further he held that Kall Kwik had breached the terms of the franchise agreement and marketing launch agreement in failing to provide marketing advice and materials.
Kall Kwik knew of Mr Bibby’s intention to incorporate and run his business through a company throughout the pre-contract negotiations and that his company (MGB) would benefit from the advice given by Kall Kwik to Mr Bibby. Therefore, the later date of incorporation of MGB did not preclude Kall Kwik having a duty of care to the then non-existent company. Mr Justice Penry-Davey held that MGB’s damage was reasonably foreseeable and it was “fair, just and reasonable” for the duty to be owed. Specifically, Kall Kwik breached its duty of care to MGB by providing the £15,000 estimation without making reference to the contractual standards required in its own contract or any physical inspection of the existing franchisee’s premises.
The courts seem to be becoming concerned at the ability of franchisors to avoid almost any liability to new franchisees by using tough and non-negotiable contract terms and we have seen several attempts to redress this balance over the last few years.
The decision makes clear that franchisors should ensure that advice and guidance given to potential franchisees is up-to-date and given with reasonable skill and care whether given verbally or in writing. That should not be of concern to any ethical franchisor. No doubt however we will soon see additional wording in franchise contracts intended to ensure that exclusion clauses cover potential liability arising for negligence prior to the signing of a contract as well as any liability arising during the term of the agreement.
Dissatisfied existing franchisees could now start looking for evidence of pre-contractual negligence. Even with such evidence, however, most franchisees are still likely to conclude that the costs and risks of an action against their franchisor are just not worth it.
Contact:
For more information please contact Geoffrey Sturgess, a partner and head of the Franchising team at Blake Lapthorn on 01865 253 284 or at geoffrey.sturgess@bllaw.co.uk.
Franchise Business News: Social Media increasingly important to franchise buyers
Joel Caws - Technical Director, Select Your Franchise
According to a recent article on SF Gate, social media is quickly becoming a research tool of choice for potential franchise buyers.
Social media sites such as Facebook and Twitter have seen an incredible rise in popularity over the recent years and Internet users are quickly becoming aware of the fact that they can use these tools to get the valuable opinions of their trusted friends and contacts on products and services they might be planning to purchase.
Franchisors who are not actively participating in these type of social media discussions will most likely lose out here. Conversations are happening about companies, franchise businesses, services and products with or without the presence of those companies in the social media space.
Smart franchisors can take advantage by monitoring what is being said about their brands and services within the different social media channels and actively responding. In fact some franchisors are already taking a more active role by promoting Facebook or Twitter only deals to create a sense of community around their brand.
The beauty of social media is that conversations are often public and can be seen by anyone in the users networks and anybody searching for your brand. If you are seen not to engage in conversation then this may ring alarm bells for potential buyers, signalling that you are a closed door outfit and not willing to be open to ideas and criticism. Rather than shy away from this open-ness, smart companies are embracing it and using it as an opportunity to engage which creates an instant ‘feel good’ factor about their company showing that they are willing to talk, are open to discuss pertinent issues and resolve problems.
Are you active within social media? What will users searching about your brand find if they search Twitter or Facebook? Will they find gripes and problems with the company itself notable in its absence? Or will they find a string of openly resolved issues and a company with an open door thats in touch with its community and open to comminunicate.
If you are not currently involved in social media, maybe now is a good time to start. At the very least you should be monitoring what is being said about your franchise brand on the most popular social networks. Conversations could well be going on about your brand right now without you!
New Block Exemption: Effects on Franchise Agreements
John Pratt - Senior Partner, Hamilton Pratt and Legal Advisor to the British Franchise Assocation
The new vertical agreements block exemption has just been published. It will come into force on the 1 June 2010 and franchisors have a transitional period until 31 May 2011 in respect of agreements already in force on 31 May 2010 to satisfy the conditions of the new block exemption.
The great majority of franchise agreements in the UK are drafted so as to comply with the block exemption and we have no reason to believe that the changes proposed by the European Commission will alter that approach.
The new block exemption is very similar to the current version but, nevertheless, there are significant changes.
First, as with the existing block exemption franchisors with a 30% or more market share do not fall within the block exemption. Whether or not franchisors do have a market share in excess of 30% does, to a large extent depend on how the relevant market is defined but, in our opinion, adopting a common sense definition of relevant market, very few, if any, franchisors operating in the UK have a market share of more than 30%. What is new with the new block exemption is that it is not only the franchisor’s market share that has to be taken into account but also a franchisee’s market share. It is, of course, quite possible that a particularly successful franchisee has a market share of more than 30% in his territory and if this were to happen, then the agreement with that franchisee (but not with those franchisees who have a lower than 30% market share in their territory) would not fall within the block exemption. This adds a quite unnecessary element of uncertainty although, in practice, the effect may not be significant because the reality is that analysing markets and market share is a complex and expensive business which few franchisees would be willing to undertake.
Secondly, the definition of know how has been changed. The good news is that the requirement for the know how to be “substantial” has been watered down. The bad news is that previously, if elements of the know how were not generally known or easily accessible then the know how would be treated as “secret”. It now seems that each element of the know how has to be “not generally known or accessible”. The definition of know how is principally relevant for enforcing post termination non compete covenants because according to the block exemption post termination non compete covenants can only be imposed in so far as they are “indispensible to protect known how”.
The third significant change is that in certain very limited situations in relation to sales promotions it may be permissible to set prices.
There are still a significant number of areas that remain unclear. As with the existing block exemption the “guidelines” to the block exemption are an extremely important aid in understanding the thinking of the Commission. At the date of preparing this advisory, we have a copy of what we believe to be the final version of the guidelines that will be published although the guidelines have not, as yet, been published.
We are hoping to announce in the very near future a webinar in the week beginning 7th June organised jointly with the British Franchise Association and Central Law Training, to discuss the changes in the block exemption, the practical things that you have to do and where areas of uncertainty remain.
John Pratt and a German lawyer Karsten Metzlaft led the Legal Committee of the European Franchise Federation’s approach to the Commission on the new block exemption.
