Commerce & Technology Partner, Mark O’Shea, considers the implication of the recent case of MGB Printing & Design Ltd v Kall Kwik UK Ltd in relation to the duty of care owed by a franchisor to a prospective franchisee. It demonstrates the need for franchisors to take care when advising potential franchisees before entering into a new franchise.
The facts
Kall Kwik is a well-known provider of print, copy and design services, and operates through a network of franchisees retailing through high street outlets.
Mr Bibby, a potential franchisee, was introduced by Kall Kwik to an existing Kall Kwik franchisee Mr Kazmierski, who operated his franchise through a limited company called Vanat Limited. The intention was that Mr Bibby would buy Vanat’s Kall Kwik franchise.
Kall Kwik told Mr Bibby that, if his company MGB Printing and Design Limited purchased Vanat’s franchise, Kall Kwik would grant MGB a Kall Kwik franchise for a fee of £20,000. Nothing out of the ordinary there – quite a typical franchise resale.
Kall Kwik gave advice to MGB regarding the cost of refitting Vanat’s outlet in order for MGB to be compliant with the minimum standards set under Kall Kwik’s then current franchise agreement. Again, this was par for the course.
MGB proceeded to purchase Vanat’s outlet and, as promised, Kall Kwik granted MGB a franchise. However, and here’s where the problems started, MGB discovered that the costs Kall Kwik had estimated for the refit were substantially less than the amount required to meet the minimum standards under the franchise agreement. Indeed, a figure of £15,000 had been given but the real figure was at least £30,000 and possibly as much as £45,000. If MGB had known the true figure, it would have offered a lower price for Vanat’s business.
Also, Kall Kwik had failed to provide marketing materials and advice and that, as a consequence, the advice in relation to the refit cost was negligent and in breach of contract. MGB suffered loss as a result and claimed damages for negligent misstatement and breach of contract.
The decision
The Court held:
(1) that Kall Kwik had given negligent advice and had been in breach of the duty of care it owed to MGB; and
(2) that Kall Kwik had failed to provide marketing advice in breach of the marketing launch plan agreement and the franchise agreement.
The court only considered liability, and left for separate trial the issues of causation and quantum of damages.
Comment
This case shows the need for franchisors to take care when advising potential franchisees before entering into a new franchise. This is especially so where the franchisee is going to place reliance on that advice when purchasing a franchise from a third party.
A duty of care will arise where (i) there is a sufficiently close relationship between the parties; (ii) it is ‘reasonably foreseeable' that the party receiving the advice would suffer damage if the advice given were negligent; and (iii) it is ‘fair, just and reasonable’ that the party giving the advice should owe a duty of care.
The case is not limited to franchise arrangements but has wider implications to all those providing advice where a duty of care arises.
For further information on this or any other franchising issue and/or in relation to minimising your liability risk for misrepresentation and breach of contract, please contact Mark O'Shea by emailing Mark or by calling him on 08450 990045, or speak to your usual contact in the Commerce and Technology Team.
This document is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from taking any action as a result of the contents of this document.