Legal advice
It's personal
Nicola Broadhurst on misusing data supplied by prospective franchisees
A recent court case has highlighted the importance of careful drafting in the franchise agreement in order to ensure that a franchisor has sufficient discretion to take action to protect its brand and goodwill. It also highlighted the potential liability faced by a franchisee for its employee's actions.
MMP was appointed as a franchisee of a large international recruitment franchisor in Switzerland. The agreement entitled the franchisor to terminate with immediate effect if MMP breached a substantial term, which included an obligation on MMP not to do anything adversely to affect the franchisor's name, trademarks or other intellectual property.
An employee of MMP had entered into a personal relationship with one of the franchisee's recruitment candidates. When that relationship ended, the employee used personal information contained in the candidate's CV to harass him, bombarding him with text messages and phone calls. After involving the police, the candidate complained to the franchisor who responded by terminating MMP's franchise agreement on grounds that its employee's actions were damaging its reputation and brand
The High Court held that the employee's actions, in misusing data from the candidate's CV, were attributable to MMP. It also held that if the employee's actions adversely affected the franchisor's brand or goodwill this would fall within the scope of MMP's obligations. However, due to the wording of the termination clause in question MMP could only have been held to have breached its obligations if it could be shown that the employee's actions had in fact caused damage to the franchisor's name or intellectual property. A mere fear or concern on the franchisor's part that such damage had occurred was not sufficient. As no clear evidence could be produced the franchisor was held not to be entitled to terminate the agreement and was in repudiatory breach of the franchise agreement by doing so. However, the Court rejected MMP's claim for damages as it rejected its method of calculation.This should have been for loss of profits and since MMP had not pleaded loss on this basis, it was unable to establish that it had suffered any loss.
Although, ultimately, the franchisor had a lucky escape, if the contractual provisions had been drafted to enable it to take action before having to show actual damage it may have won the case. Franchisors should review their termination clauses to ensure they extend to actions of franchisee's employee's and provide sufficient discretion to take action.
Author: Nicola Broadhurst is the head of franchising for Stevens & Bolton.
