Franchisors Duty of Care in the U.K.
Do franchisors have a "duty of care" towards franchisees and an obligation to provide an honest assessment of costs that franchisees will encounter during start-up? Apparently, in the United Kingdom they do.
In "MCB Printing and Design Limited v Kall Kwik UK Limited" the court found:
". . . 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."
The court recognized that there was "a clause of the agreement that excluded liability for pre-contractual statements, but held it not to be applicable." This would also hold true in South Africa with regard to franchise dealings and contracts that have franchisees sign away their rights and, essentially, legalize fraud:
"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." Lexology.com
Would these same laws require more accurate profitability assessments for the sale of franchises? If the franchisor has knowledge of the cost of "refitting the premises", don't they also have knowledge of revenues and costs?
This smacks of a franchisor given too much credit for franchising and business expertise for just being a 'franchisor'. Smarts doesn’t come with the title but prospects don’t seem to understand that having the title ‘franchisor’ doesn’t necessity mean the franchisor is an astute or sophisticated business person with a ‘proven model’.
Isn’t it that in this case there was more of a duty to be accurate? My understanding is that that duty is a winnable argument on any continent if the franchisee can fund a case.
That this franchisor misrepresented refit costs and under-estimated the financial resources of the franchisee thus over-estimating its ability to get away with misrepresentation suggests that the franchisor isn’t that bright. A more ‘sophisticated’ franchisor would be more careful. Not so much in its misrepresentations but in its approach to avoiding conflict with franchisees with an ability to fight.
Over the last 2 weeks I’ve had contact with 2 prospective franchisees from 2 different systems faced with cost representations that they were both about to underestimate.
Both franchisors were suggesting major leniency on standards compliance at operator changeover for expediency reasons. Non-compliance was being sold as ‘big savings’ while in the same mouthful the system standards were being sold as a business/model asset/strength.
Should they choose to sign up neither of these franchisees will be in a position to challenge once those savings evaporate and return as expenses and mandatory system compliance as stated in every franchise agreement is back.
This UK case is more about one of those comparative oddities that arise from time to time where the franchisee actually gets to fund a case. Perhaps here is a case that argues one reason for signing on with unsophisticated, under-financed franchisors. Conflict and poor investment quality might be more likely but the chances of a win increase. Hey … every cloud apparently has one …
Australia’s Unfair Contracts Law introduced last year excluded franchisees. Think about it.
Kwik Kall isn/t a new franchisor. It has been franchising in the
UK for over 35 years and is the UK franchise operation - through area development last time I looked - of Kwik Kopy franchsing in the USA. Kwik Kopy is part of an operation called ICED (International Center for Entremanurial Development) headquartered here in Houston.
Re: No they don't
Richard, I am a bit confused by your comments. First you state ". . .like the items you are referring to on resales." Obviously, you picked up on the fact that this case involved resales. Then you stated: "If this were a resale case and not a start up case with a franchisor. . ." Well, it is a resale case.
I wasn't sure if I was not grasping your meaning with these seemingly conflicting statements or if, because of the surgery, you are making up lost time at Muldoon's.
Regardless, my posts of legal articles are only meant to get those in the legal profession to comment. I am not, nor do I pretend to be, a lawyer/legal expert. I do, however, like to read responses from those experts on these topics because it does help educate the readers on this site.
My question is simply, if the franchisor is being held accountable for knowing and not disclosing expected costs, can this be expanded upon and used in other instances where the franchisor knows the costs or expected revenue and does not disclose it to the potential franchisee?
Mea culpa, OldWad. I thought it was a startup and not a resale
case. Are you sure it is a resale case. In a resale only a complete fool would buy without seeing at least 3 years operating statements and tax returns which would have provided him with the information he claims was not there or that was misstated.
But maybe the buyer was a total moron. God knows that's the level of most who are buying franchises these days.
One called the other day about getting my help on a franchise investment.
Muldoon: What franchise do you intend to buy?
Muldoon: No you don't.
FranWad: OK smart ass. You tell me what franchise I want to buy.
Muldoon: You want to buy one where there is evidence of significant revenue credfibility over the life of the franchise agreement - regardless of what it sells.
FranWad: I had a feeling that if I called you you might try to talk me out of SmoothieWoothies. Everybody loves SmoothieWoothies. People are said to drive miles out of their way to get a SmoothieWoothie. I'm gonna buy a SmoothieWoothie franchise. Do you wanna help me?
Muldoon: No thanks. Good luck.
Re: Mea culpa
Richard, the buyer claimed he would have either not purchased the existing franchise (had the price remained the same) or would have "agreed to a reduced purchase price of the franchise". It does not appear that the operating statements were part of the complaint.
In this case, the franchisor led the buyer to believe the costs associated with the rebuild would be "x" - knowing that the real costs would be "2x". The court then found the franchisor to have withheld material information that negatively impacted the franchisee. Please read below:
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.
Its an interesting case that appears to place greater responsibility on the franchisor to provide truthful numbers. I am curious if this can be held as precedent in the UK and expanded to include other "known" numbers.
Lastly, I agree, there will always be franchisees that have sold themselves on a given system - no need for any sales manipulation.
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No they don't
One thing has nothing to do with the other. Statement of start up costs is nothing like the items you are referring to on resales.
If this were a resale case and not a start up case with a franchisor that has a long UK history of selling new franchises, the court probably would not have dealt with it in this holier than thou manner.
UK courts are usually tougher on franchisees who want things not provided for in the agreement than USA courts - same in Australia. Also the issue depends in large part upon whether there was active misrepresentation or just failure to disclose.
You can't take a sympathetic statement by any court and simply expand that as if by magic to other situaions. Arguments and comparisons that get you a good grade in the semenary will get you an F in law school.