Over the years, franchising has gained a, somewhat unfair, reputation for disputes and litigation between franchisors and franchisees.
The recent High Court decision in MGB Printing & Design Limited v Kall Kwik UK Limited has once again emphasised the fact that if franchisors make rash promises which they cannot fulfil they will be held to account.
The action, which was conducted by Russell Ford, a partner in Owen White, on behalf of the franchisee, concerned a limited company franchisee which had purchased an existing Kall Kwik franchise business. Before the franchisee’s principal, Mike Bibby had signed the franchise agreement he had discussions with Kall Kwik about the costs of updating and rebranding the existing centre, the transfer of a customer database onto a new software system which Kall Kwik required, and the content of a marketing launch programme for the first twelve months after he acquired the business.
The Judge held that Kall Kwik had not given accurate advice about the costs of upgrading the centre as a result of which the Claimant was likely to spend between £15,000–£30,000 more than originally Kall Kwik had estimated. This was despite the fact that they had their own shop–fitting guidelines at the time the advice was given, but they had not divulged those guidelines to the Claimant until after he had acquired the franchise business. The Court held that Kall Kwik had also undertaken to transfer the existing customer database onto their bespoke software system and had failed to do so and that they were in repeated and serious breach of a marketing launch programme contract for which they had charged the franchisee thousands of pounds.
The Judgment was critical of Kall Kwik in trying to minimise the contractual obligation in the franchise agreement to provide advice, knowhow and guidance from time to time. The Judge held that their obligation was to perform those obligations and to exercise reasonable skill and care. On the facts he found that was either deficient or entirely lacking.
Contractual obligations upon a franchisee are lengthy and precise. Obligations on a franchisor, in the franchise agreement, are often far shorter and written in more vague terms. However, the lesson for franchisors is that despite the looseness of their own obligations, such as to give advice and guidance from time to time, that where they provide that advice and guidance, it must be carried out with reasonable skill and care. The burden of proof is always on the franchisee to establish that reasonable skill and care has not been provided. Franchisors have long been able to negotiate with litigious franchisees by making it clear that any allegation of breach of contract would be vigorously defended and a cautious franchisee will often withdraw from attack at that point.
Franchisors should ensure that where they provide a brochure or prospectus or any written statement setting out what they will do for a prospective franchisee, that it must be up to date, reflect current business practice, and be accurate. Franchisors should also ensure that they meet those obligations.
If disputes arise, a wise franchisor will, on understanding their potential exposure to a claim or judgment, attempt to rebuild the franchisee’s confidence in their ability to deliver on their promises and will go the extra mile for that franchisee to remedy any earlier failures. Litigation can be expensive and is both time consuming and emotionally draining for all parties. Those hidden costs, and the risk of adverse publicity, cannot be underestimated.
Mike Bibby, who instructed Owen White on the original re–sale prior to the litigation, is still a Kall Kwik franchisee. The litigation now proceeds to a hearing to assess damages.