Pearson Hinchliffe Solicitors - Professional Understanding - Advising - Supporting - Delivering

E-mail: enquiries@pearson-hinchliffe.co.uk | Telephone: 0161 785 3500

Franchisor Owes a Duty of Care

In a recent decision, the High Court has held that a franchisor owed a duty of care to a potential franchisee in providing advice on likely franchise costs in assuming and setting up a franchise.

Unlike some other jurisdictions, franchising has no specific regulation in the UK however this decision demonstrates that franchisors must take great caution when advising potential franchisees before entering into a new franchise (especially as in this case when their advice is relied on by the franchisee to acquire an ongoing business from a third party).

Details of the franchisee's claim 

In the case of MGB Printing & Design Ltd v Kall Kwik UK Ltd [2010] EWHC 624 (QB) K was a franchisor of outlets for print, copy and design services. K introduced B (a potential franchisee) to one of its existing franchisees, V, on the understanding that, if V’s business and premises was purchased by B, K would grant B a new franchise agreement for a fee. 

Importantly K gave specific advice to M on the cost of refitting the premises occupied by V, to ensure compliance with the terms of the proposed new franchise agreement.

B acquired V’s premises and entered into a franchise agreement with K. B later discovered that the refit costs estimated by K were grossly below those actually required to be expended  to meet the standards required by the franchise agreement. Had B known the true cost, it would have negotiated to substantially reduce the price paid to V. 

B successfully sued K for negligent misstatement to recover its loss along with other claims.

The court held:

• K had voluntarily held out to B that it had the capacity to give (and gave) professional advice in respect of the refit costs.
• B relied on the advice and suffered loss by grossly overpaying V for the premises.
• The exclusion of liability clause under the franchise agreement (which excluded liability for pre-contractual misrepresentations) was irrelevant, since K’s advice had nothing to do with loss arising under the franchise agreement itself but related to the loss suffered by overpaying for the premises acquired from V.

Conclusion

The court’s decision confirms that the franchisor may owe a duty of care to his franchisees and even potential franchisees. If you are a franchisor or franchisee and would like further information on your  legal rights and responsibilities created by a franchise agreement, please contact Corporate Commercial solicitor, Russell Bateman using the details provided below.

Pearson Hinchliffe Commercial Law | Hollinwood Business Centre, Albert Street, Hollinwood, Gtr Manchester, OL8 3QL
Telephone: +44 (0)161 785 3500, Fax: +44 (0)161 624 2589, Email: enquiries@pearson-hinchliffe.co.uk