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UK High Court Determines Franchisor’s Duty of Care to its Franchisees

DATE: 23.06.2011

 

Introduction

The recent English High Court decision in MCB Printing and Design Limited v Kall Kwik UK Limited [2010] EWHC 624 (QB) establishes the duty of care owed by a franchisor to its franchisee and to potential franchisees. The Court found that the provision of negligent advice by the franchisor constituted a breach of this duty of care. 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 Claim

The claim concerned the negligent advice given by the defendant franchisor on the cost of refitting the premises to the franchisor's mandatory requirements. Applying the general principles of the tort of negligence(1) regarding the imposition of a duty of care, the judge found the defendant franchisor liable.

The Facts

The claimant 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 that the estimate was provided without 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.

Conclusion

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 its duty of care to the claimant despite the fact the claimant was not yet its 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.

(1) The Court specifically relied on the legal principles set out in Hedley Byrne v Heller [1964]AC 465 and Caparo Industries v Dickman (1990) 2 AC 831

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