a chink in the armour of the franchisor?
Franchising is not a regulated activity in the
UK and new franchisees are not protected by consumer law. As a
result a UK franchisor armed with a 'standard' franchise contract
including single agreement and no reliance clauses has 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 likely to be appealed, the decision is significant to
the industry.
The case concerns Mr Bibby, sole shareholder 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 and
Mr Bibby 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 existing premises
having not inspected the premises during the term of the existing
franchise agreement.
MGB entered into a franchise agreement and subsequently a
marketing launch agreement with Kall Kwik and both parties entered
into a sale agreement with the existing franchisee. It later became
apparent to MGB that the cost to refurbish the premises to Kall
Kwik's contractual standards far exceeded the estimate given, being
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 agreement.
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. Furthermore, Kall Kwik denied negligence
and breach of contract.
Kall Kwik's arguments included reliance on a boilerplate "entire
agreement" clause.
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 date of
incorporation of MGB did not preclude Kall Kwiks's duty of care
arising and the proximity of the parties during negotiations was
held to be sufficient to satisfy the first step in the three part
Caparo Industries v Dickman [1990] 2AC 831 test. To
satisfy the remaining parts of the test 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. Furthermore, Kall Kwik
breached its duty of care to MGB by providing the £15,000 estimate
without making reference to the contractual standards required in
its own contract and the physical inspection of the existing
franchisee's premises.
One of the lawyers involved with the case has recently told us
that an appeal is under consideration and rumours are circulating
in the franchise community of a firm trawling for dissatisfied Kall
Kwik franchisees who might band together for a group action.
As it currently stands, the decision suggests that franchisors
should ensure that advice and guidance given to potential
franchisees is up-to-date and given with reasonable skill and care
both in printed literature and during negotiations. Further, that
the wording of franchise contracts is revisited to ensure that
exclusion clauses are broadly drafted to include potential
liability arising in tort prior to the signing of a contract as
well as any liability arising post execution and no doubt we will
soon see such wording appearing in franchising contracts.
Franchisees on the other hand, disillusioned with their
franchisor, might now start looking for evidence of pre-contractual
negligence. However, even with such evidence franchisees may
conclude the costs and risks of an action against their franchisor
are just not worth it.
