Keywords: Franchisee vicariously liable for employee’s conduct – conduct not sufficiently serious to constitute repudiatory breach – franchisor’s reliance upon pretext to justify termination of franchise agreement – assessment of damages for wrongful termination of franchise agreement – discounted cash flow method rejected in favour of conventional assessment of loss of profits.
The claimant company (MMP) was a recruitment consultant and an ex-franchisee of the defendant franchisor, an international recruitment agency (Antal). The franchise agreement that the parties had entered into contained a term (clause 16) which expressly prohibited MMP as the franchisee from doing anything that adversely affected Antal’s name or trade marks, and gave Antal an express right to terminate the agreement for breach of that term.
In and shortly before June 2008, MMP’s sole employee harassed one of MMP’s clients, with whom she had previously had a personal relationship. Upon discovering this, Antal terminated the franchise agreement on the grounds that the franchisee’s employee’s conduct constituted a breach by MMP of clause 16. Notwithstanding the termination, and despite some resultant disruption, MMP was nevertheless able to and did continue its business as a recruitment consultant, albeit without using Antal’s name or trade marks.
MMP alleged that Antal’s reliance upon clause 16 was a pretext, and that its real reason for terminating the agreement was its dissatisfaction with MMP’s performance under the agreement. MMP sued Antal for breach of contract, alleging that Antal’s termination of the agreement had constituted a repudiatory breach, and claimed damages against Antal for breach of contract.
MMP’s claim for damages for breach of contract was calculated not on the conventional basis of loss of profits suffered as a result of the breach, but rather on the basis of the discounted case flow (DCF) method; that is, by assessing the difference between the value that MMP would have had if sold as a going concern immediately after termination without the benefit of the franchise agreement (which MMP claimed was nil), and the value that MMP would have had if it had been sold as a going concern at that time if the franchise agreement had not been terminated, i.e. with the benefit of the franchise.
(i) Whether or not MMP could be held responsible for its employee’s conduct; if so, whether MMP had been in breach of clause 16 of the franchise agreement, or had otherwise been in repudiatory breach of the agreement by reason of that conduct, or whether Antal’s termination of the agreement had itself constituted a wrongful and repudiatory breach of the agreement.
(ii) The appropriate method of assessing MMP’s loss arising from Antal’s wrongful termination of the franchise agreement.
Held (Flaux J.)
The fact that Antal was dissatisfied with MMP’s performance under the agreement and wanted to terminate the agreement in any event, and was using the franchisee’s employee’s conduct as a pretext for terminating the agreement, was irrelevant if, in fact, that conduct did entitle Antal to terminate the franchise agreement for breach of clause 16.
Further, since the employee’s conduct would have constituted a breach of her employment contract with MMP, had involved the harassment of one of MMP’s clients, and had involved the misuse of data from that client’s CV, it could not be said that the employee had simply been on a frolic of her own, and accordingly, her actions were attributable to MMP.
However, there was no evidence that any damage to Antal’s reputation had actually been caused by the employee’s conduct at all. Consequently there had been no breach of clause 16. For the same reason it could not be said that the employee’s conduct had been sufficiently serious as to go to the root of the contract, and consequently Antal could not rely upon that conduct as constituting a repudiatory breach of the agreement outside of the terms of clause 16. Antal’s own act of terminating the agreement was therefore itself a repudiatory breach of the agreement, entitling MMP to damages for the wrongful termination.
However, whilst Antal’s breach of contract had deprived MMP of the benefit of the franchise, it had not closed down MMP’s business and had not forced it to be sold. It was therefore appropriate to measure the damages suffered by MMP not by using the DCF method, but by deducting (a) the net income of MMP without the benefit of the franchise from (b) the net income that MMP would have had if the breach (the wrongful termination) had never taken place; i.e., the appropriate measure of damages in such circumstances was the usual measure of damages for breach of contract, namely the loss of profits suffered by MMP as a consequence of the breach.
If the effect of the breach of contract had actually been to put the company out of business it would not have been possible to assess damages on the basis of loss of profits in the normal way, and in such situations (but only in such situations), the Court could fall back on the DCF method as a proxy for assessing the loss of profits, by seeking to value the company as at the date of breach. However, where, as in this case, it was possible to assess the loss of profits in the normal way, then that should be the measure of damages.
Since MMP had failed to establish under the loss of profits method that it had suffered any loss at all as a result of Antal’s breach, MMP was at most entitled to nominal damages.
UYB v British Railways Board (1999) (unreported, HHJ Raymond Jack QC) – considered, distinguished
Crehan v Inntrepreneur Pub Co CPC  EWCA Civ 637 (CA) – considered, distinguished
Automotive Latch Systems v Honeywell International Inc  EWHC 2171 (Comm) – mentioned
Only in unusual situations, such as those in which an ex-franchisee is completely put out of business by wrongful termination of the franchise agreement, will damages for breach of contract by wrongful termination be assessed by reference to the value of the lost business; the usual approach will be to assess the loss of profits suffered as a result of the wrongful termination and resultant early loss of the franchise.