Franchisor owes a duty of care to franchisee

In the recent case of MGB Printing and Design Limited v Kall Kwik UK Limited [2010] EWHC 624 (QB), the High Court issued a warning to all franchisors, holding that a duty of care is owed by a franchisor to a potential franchisee.

The facts of the case involved MGB’s purchase of Kall Kwik’s printing services franchise in Cheshire. During negotiations it became clear that the franchise had not been kept in a good condition, and, as such, the premises required a re-fit to meet the franchisor’s mandatory requirements. Kall Kwik advised MGB on the costs of the re-fit and estimated a figure of £10,000. This later changed to £15,000 after MGB expressed concern that the original figure was insufficient to meet all of Kall Kwik’s requirements. The actual cost of the re fit was in excess of £30,000.

MGB claimed they had relied on Kall Kwik’s estimate and that had they known the true cost of the re-fit they would have either withdrawn from the purchase or at the very least, negotiated a reduction in the purchase price. MGB sought damages from Kall Kwik claiming that Kall Kwik had failed to exercise reasonable skill and care when advising MGB on the cost of the re-fit and as a result, MGB had suffered a financial loss.

The High Court agreed and stated that Kall Kwik had given MGB negligent advice in relation to the re-fit, which was in breach of the duty of care that Kall Kwik owed MGB.

The case confirms that franchisors can owe a duty of care to potential franchisees and provides a warning to franchisors that any advice given to prospective franchisees should be done so with due skill and care.

Franchisors generally operate from a powerful position when entering into agreements with franchisees and the negotiations are often very one-sided. The franchisor is likely to already have a successful and thriving business and the prospective franchisee, aware of this success and keen to share in it, will simply agree to the proposed conditions and requirements of the franchisor. This case suggests that a more cautious approach may now be needed from franchisors.

MGB were also successful in their claim for breach of contract by Kall Kwik. The claim related to the franchise agreement and the marketing agreement, which was entered into shortly after the purchase of the franchise. Kall Kwik had agreed to provide MGB with advice and support in relation to some of the methods used by Kall Kwik in the promotion of its business and also agreed to transfer client related data to MGB, but in both cases failed to do so. As a result, the High Court held that Kall Kwik were in breach of contract.

The issues of causation and quantum in this case are to be tried separately, but Kall Kwik is first expected to appeal the judgement on liability.