A recent high court decision has concluded that the actions of a franchisee's employee were attributable to the franchisee. However, despite the employee's misconduct, the franchisor was not entitled to terminate the franchise agreement.
Implications for franchisors and franchisees:
- Franchisors would be wise to review their franchise agreements to ensure there is sufficient flexibility to allow them to terminate where there is a concern that the behaviour or conduct of a franchisee (including its employees) risks damaging the franchisor's brand and reputation. The ability of the franchisor to immediately terminate the agreement is vital as any delay could potentially increase the level of damage being sustained.
- Franchisees should be aware that the conduct of employees can be attributed to them even where the conduct in question takes place outside office hours or where the employee appears to be acting in the capacity of their private lives.
The claim
MMP Gmbh (formerly Antal International Network Gmbh) v Antal International Network Limited
MMP and Antal (a recruitment agency) entered into a franchise agreement by which Antal agreed to license to MMP its business systems, name and format. The agreement imposed a number of prohibitions:
- that MMP must "not at any time, do anything to prejudice the operation or reputation of the Business, our business or any of our other franchise businesses" (clause 16.2(k))
- that MMP must "not at any time, do anything to affect adversely our name, Trade Marks or other Intellectual Property" (clause 16.2(l))
Clause 22.2 allowed Antal to terminate the agreement immediately if there was a breach of clause 16.2(l) as this was a "substantial term".
An employee of MMP began a relationship with a candidate who she was assisting in her capacity as a recruitment consultant. After the relationship ended, the employee used personal data from the CV the candidate had submitted earlier to locate and harass him over a period of months. Following a complaint by the candidate, Antal investigated and became concerned that the behaviour of the employee could do real damage to the Antal brand, and that that damage could spread quickly and broadly in the smaller Swiss market in which it was operating. Antal terminated the franchise agreement relying upon a breach of clause 16.2(l).
Were the actions of the employee attributable to MMP?
Yes.
The candidate was not complaining about the private actions of a woman with whom he had had a relationship but the actions of an individual he had engaged as a recruitment consultant and who was misusing data obtained from his CV. The employee was acting in her professional capacity.
Did the employee's conduct amount to a breach for which the agreement could be terminated?
No.
Although clause 16.1(l) did not expressly mention "brand" or "goodwill", it was accepted that this fell within the meaning of "name" or "Intellectual Property". It was accepted that the actions of the employee could adversely affect the name or Intellectual Property of Antal and that Antal feared it would have this effect.
However, Antal failed to provide any evidence that the conduct had in fact damaged the brand, which the court decided was required by clause 16.1(l). As it was unable to prove actual damage, Antal could not rely on clause 16.1(l) to immediately terminate the agreement.
The court also consider Antal's reliance on clause 16.1(k), which dealt with operational matters and the extent to which poor performance of the franchise agreement could prejudice the operation or reputation of the business. This clause was not a substantial term and its breach could be remedied unless the breach was so significant as to amount to a repudiatory breach. As Antal had not provided any evidence that MMP's conduct or that of the employee had prejudiced its reputation or operation, it could not demonstrate that there had been a breach of clause 16.1(k) so serious as to entitle it to immediately terminate the agreement.
Conclusion
Protection of the brand and reputation of any business is vital and this case is a reminder of the importance of ensuring that the provisions of any contractual arrangements between parties are sufficient to ensure that protection is given. If an issue arises which could lead or has led to damage to a brand or reputation it is essential that the termination provisions allow the affected party to bring the agreement to an end before any further damage is sustained.
The outcome of this case may have been different had clause 16.1(l) been drafted to include provision for "the reasonable opinion of Antal". Had it done so, Antal's fear or concern of damage to the brand could have been sufficient to entitle it to immediately terminate the agreement.
This case is also a reminder that although it may be difficult to prevent employee misconduct, businesses should in any event put in place processes to ensure protection of personal data.
For franchisees, the implications are equally significant. The conduct of the employee was held to be attributable to the franchisee even though on the face it the capacity in which the employee was acting (ie private or professional) might not have been entirely clear.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.