It is quite common in the UK if a franchisor pursues a franchisee for damages in respect of the franchisee’s unlawful termination of the franchise agreement for franchisees to counterclaim on the basis of a franchisee’s alleged breaches of contract and/or misrepresentation.
The High Court agreed with the franchisor that the franchisee’s failure to make a payment of approximately 150 euros when due, the failure to provide a sales report and a failure to provide a list of actual and potential customers amounted to a repudiatory breach of the franchise agreement. The franchise agreement contained a ‘time of the essence’ clause in respect of the franchisee’s obligation to pay the franchisor which the British Franchise Association has ‘banned’ from members franchise agreements on the basis that it is unfair because it enables a franchisor to terminate a franchise agreement even if a franchisee is only one day late in making a very small payment.
The franchisor claimed that it should receive 70,000 euros in damages but was only awarded 25,000 euros in damages on the basis that the franchisee was, in fact, doing little business. The Court accepted that the franchisee had breached the post termination non compete covenant but only awarded the franchisor a nominal 3 euros in respect of such breach because the Court found that there was no evidence of any prospective franchisee expressing any interest whatsoever in taking over the territory of the franchisee. In respect of the franchisee’s counterclaim the Court found that the optimistic figures contained in the plan and forecast prepared by the franchisor for the franchisee did not materialise. The franchisee also alleged that the franchisor had made misrepresentations concerning the failure rate of its franchisees. The franchisor sought to rely on a clause in the franchise agreement to the effect that the franchisee had not relied on any representation, but the Court concluded that the clause could not be effective to prevent a claim in respect of a franchisor’s fraudulent misrepresentation. The Court concluded that the representations were, indeed, fraudulent and the Court calculated that the franchisee should receive damages of approximately 180,000 euros.
John Pratt, IDI franchising Country Expert for UK.
