Terminating franchise agreements: A risky business

MMP GMBH v Antal International Network Limited is an interesting case about how damages should be calculated for breach of a franchise agreement. It is of particular interest to franchisors because it identifies that wrongfully terminating a franchise agreement might result in having to pay substantial damages.

MMP was a Swiss company incorporated by its sole shareholder and managing director, Mr Oscar Bosshard. Mr Bosshard wanted to run a recruitment agency, so MMP entered into a franchise agreement with the defendant, Antal International Network Limited. The agreement was for a term of 15 years for which MMP paid a one-off franchise fee of £25,000 and a monthly management fee of 12% of gross sales.

All appeared to go well for five years until June 2008 when a candidate of MMP made a complaint to Antal about the conduct of Ann-Frances Bosshard, the daughter of Mr Bosshard, who was the only other employee of MMP. It seems that the relationship between Ms Bosshard and the complaining candidate, Mr Baumann, had gone beyond merely professional, on a few occasions at least. However, the relationship had come to an end, seemingly to the dissatisfaction of Ms Bosshard, who harassed Mr Baumann with over 1000 text messages and phone calls at all hours of the day and night, to the extent that she was cautioned about her behaviour by the Swiss police!

The franchise agreement between Antal and MMP contained what was described as a "substantial term" which prohibited the franchisee from doing anything "to affect adversely [Antal’s] name, Trade Marks or other Intellectual Property". As is commonly the case, the franchise agreement also provided that Antal could terminate it immediately for breach of any such, "substantial term".

In reliance on these provisions, Antal terminated the franchise agreement in June 2008 on the grounds that Ms Bosshard’s behaviour was damaging to its name, Trade Marks and reputation.

Following termination of the franchise agreement, MMP stopped trading for a few months but then continued in business as a recruitment consultancy independently of Antal.

MMP sued Antal alleging wrongful termination and claiming damages for breach of contract. MMP claimed they were owed the difference in the value of the company with the benefit of the Antal franchise and its value without it. MMP claimed that without the Antal franchise the company was valueless.

The court therefore had to decide:-

  1. Whether the behaviour of Mr Bosshard’s daughter amounted to breach of a substantial term of the agreement entitling Antal to terminate it; and
  2. If Ms Bosshard’s behaviour did not amount to breach of a substantial term and Antal had therefore wrongly terminated the franchise agreement, how should the compensation payable to MMP be calculated.

On the first of these questions the judge concluded that Ms Bosshard’s behaviour did not amount to a breach of the substantial term of the franchise agreement prohibiting the franchisee from doing anything which would damage the reputation of Antal. Many franchisors may consider this to be a surprising decision at first glance but careful examination of the judgment reveals the reason, and an important lesson for franchisors and indeed anyone in business.

It seems that a number of internal e-mails at Antal were produced in evidence and relied upon successfully by MMP to demonstrate that Mr Bosshard and MMP had already been viewed as something of a thorn in the side by Antal. Ms Bosshard’s behaviour had in the judge’s opinion, been seen by Antal as an opportunity to get shot of her father and his company.

There was also internal e-mail correspondence in which the CEO of Antal acknowledged that MMP’s franchise agreement had been terminated, "under specious grounds without warning".

The Judge therefore concluded that Ms Bosshard’s actions had not damaged the reputation of Antal in breach of the substantial term and it is pretty clear that this conclusion was reached in part at least on the basis of Antal’s internal e-mail correspondence acknowledging both a sense of relief at having got rid of Mr Bosshard and MMP and that the grounds on which they had done so were suspect.

This serves as a stark reminder that anything committed to writing in business may one day be read by a judge. Seemingly inconsequential internal e-mails which may not be given particularly careful scrutiny before they are sent, could mean the difference between winning and losing at least a point, if not the entire match, in court.

Having decided that Antal was in breach of the franchise agreement, the judge then had to decide how much it should be ordered to pay to MMP by way of compensation.

MMP had claimed the difference in the value of the company with the Antal franchise and the value without it. Having claimed that the company was valueless without the franchise, MMP was therefore claiming the value of the company at the date of termination in June 2008.

The judge ruled that this was not the correct way to measure damages. He said instead that they should be calculated by reference to loss of profits. Again, much turns on the facts of this particular case but the fact that the company had continued in business as a recruitment company without the benefit of the Antal franchise, even if there was a pause of a few months, meant that it was relatively easy to work out from actual figures whether the company had made a loss of profit as a result of losing the franchise and if so, how much.

The alternative put forward by MMP would involve assessing damages on the basis of a hypothetical valuation of the company at the date of termination, on the hypothetical basis that it had ceased doing business at that date, which it hadn’t. The judge made it clear that courts do not like making awards of damages on the basis of the hypothetically hypothetical!

Interestingly, MMP had chosen not to plead for damages calculated on a loss of profits basis as an alternative to their claim for loss based on the difference in valuation. Had they done so they would at least have given themselves a chance of being awarded some compensation, although the comments of the judge concerning the speculative and unrealistic valuations put forward by MMP indicate that he would probably have given them well short of what they were hoping for.

Andrew Hayward, Partner
Owen White
20 May 2011

If you are interested in knowing more, or would like advice on a particular situation, please e-mail Andrew Hayward, Jane Masih or Russell Ford, or telephone 01753 876800.