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The franchisor's duty of care to potential franchisees

by Eugene Honey, Prof Wim Alberts

In a recent decision in the United Kingdom, MCB Printing and Design Limited v Kall Kwik UK Limited, the existence of a duty of care owed by franchisors in dealing with franchisees, including potential franchisees, was confirmed.  In the course of the court's judgment, it dealt with a description of the nature of a franchise.  It was stated that 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 the franchisee and the 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 bases of the franchisee’s case were the following.

The plaintiff (potential franchisee) was considering buying an existing franchise business as a going concern and sought advice from the potential franchisor on the cost of refitting the premises so as to meet the franchisor's compulsory requirements.  The franchisor initially indicated that the cost would be £10 000, and later that it will be £15 000. It transpired that the real costs were between £30 000 and £45 000.  The franchisee indicated that had he known the real costs, he would not have proceeded with the transaction, or would only have agreed to a reduced purchase price for the franchise. The court considered a clause of the agreement that excluded liability for pre-contractual statements, but held it not to be applicable. It was emphasised that such a standard clause should be construed strictly against the offeror, being the franchisor. It was then held that the franchisor did indeed had a duty of care towards the franchisee, in view of the sufficiently close and proximate relationship between them, the foreseeability of damage, and because it is fair, just and reasonable to impose such a duty.  The franchisor was thus liable on the ground of causing damage to the franchisee.

A second ground of action was non-compliance by the franchisor with marketing procedures agreed on. The parties agreed on what was called a marketing launch plan agreement.  This involved, amongst others, the creation of a data base of contacts which the franchisor would utilise to implement a programme of intensive direct marketing, a press release by the franchisor relating to the franchisee’s business, and personalised mailings to top clients. The agreement envisaged the use of a system known as Marlin which was provided by the franchisor as part of its standard equipment package. The basis would be that the franchisor would train the franchisee and its staff to use it.  This system was however not installed fully. The court found that the franchisor did not comply with its contractual obligations relating to the marketing launch plan agreement in various respects, and the franchisor was thus guilty of breach of contract.

The outcome of the case is in line with what the position would be in South Africa. In terms of what is known as delictual liability, any person can claim damages from another if there has been a negligent act which has caused patrimonial damages, such as negligence in the supply of information. This liability is of general application, and does not depend on the existence of a contractual relationship between the parties. It also appears that courts would scrutinise closely any exclusionary clause. Moreover, the Consumer Protection Act provides protection against contracts of an unfair nature in which rights are waived. Lastly, the approach followed in relation to the issue of breach of contract also accords with South African law.

Friday, July 23, 2010