Chink in the armour:  the High Court highlights a flaw in franchise agreements

Franchisees benefit from exploiting the franchised brand and they should act to uphold the brand’s reputation.  Equally, franchisors must ensure that their franchise agreements provide them with adequate recourse in the event a rogue franchisee acts in a way that may damage the brand.

The case of MMP v Antal 2011 highlights the importance of ensuring adequate provisions are in the franchise agreement, and that termination procedures are carried out correctly.

MMP (the franchisee) entered into a franchise agreement with Antal (the franchisor). An employee of MMP accessed information that was then used for improper purposes and Antal’s management feared damage to their brand. They terminated the agreement on the grounds that MMP had breached a ‘substantial term’ of the agreement not to ‘affect adversely (Antal’s) name, trade marks or other intellectual property’.

The court ruled that Antal had not brought enough evidence to show that the brand had been damaged. Antal had therefore wrongfully terminated the agreement. Although the court accepted that Antal’s fears of brand damage were genuine, this was not sufficient reason to terminate under the agreement as it was drafted.

Practically, it may be quite difficult to establish actual damage caused to a brand. Indeed, in this case, despite establishing the improper use of the information, the court was not satisfied that these actions necessarily caused damage. Since Antal had unlawfully terminated the agreement, they were liable to pay some damages to MMP.

Franchisors should carefully consider the terms of their agreements and ensure that these grant them the flexibility to take appropriate action to protect their brand. The outcome of this case may have been very different had there been provisions in the franchise agreement to enable Antal to terminate where they had a ‘reasonable belief’ that MMP had damaged the brand name.

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