Its good news for franchisors in the care sector, says business expert Fiona Boswell, who reviews a significant recent court ruling.
Franchisors will have been delighted by the recent court ruling which decided that financial compensation was not sufficient if a company’s reputation and image had been tarnished. The case in question involved a domiciliary care provider which had received complaints from a local authority about one of its franchisees.
The council was not satisfied by the level of care and compliance being provided by the franchisee in question. Following these complaints, the franchisor terminated the franchise agreement, while also seeking to prevent the former franchisee from continuing to offer care outside of their network.
In other words, the franchisor felt they had every right to prevent the former franchisee from setting up in competition. Therefore, the franchisor decided they needed to take legal action by seeking an interim injunctive relief. This would enable them to enforce its restrictive covenants.
Injunctive relief, also known as an injunction, is a legal remedy aimed at stopping a defendant from continuing in their role, if it is considered to be damaging to someone else – in this case the franchisor.
The result of this case should give franchisors confidence that the courts have recognised the importance of their reputation and image, which needed to be preserved at all costs. It also sends out a message to existing franchisees within the network, illustrating the importance of adhering to the franchise agreement they signed.
This means that damages alone was not considered to be a suitable remedy for this type of contract breach. I believe this court ruling was taken because of the special nature of the sector, and its impact on the care of often vulnerable individuals. The care sector is an industry with unique considerations.
In this instance, the majority of those affected were in local authority placements. It is also important to point out that the local authority fully supported the franchisor, by highlighting the poor standard of care being provided by the terminated franchisee. The local authority was also able to confirm that they could continue to care for those affected, by choosing an alternative care provider.
Takeaway:
1: This ruling shows that damages are not an adequate remedy when a franchisor’s brand image suffers because of the action of one of its franchisees.
2: It is vital that franchisors are in a position to police their own network, so that standards are adhered to.
3: If damages alone were awarded, then there might be issues about the ability of the former franchisee to pay.
So what are the practical implications of this decision?
Franchisors should now have restored confidence in being able to enforce restraints included in their franchise agreements. Franchisors should also feel confident that judges appreciate the distinct differences between franchises and other business concepts. This is vital when assessing whether interim injunctive action should be granted.
The ruling demonstrates how those involved in the care sector can overcome the hurdle of ensuring continuity of care, when seeking to enforce restraints. Finally, it highlights the importance of carefully terminating franchise agreements, in order to avoid an argument with franchisees following a repudiatory breach.
Additional reading: The intriguing case of Dwyer (UK Franchising) Ltd v Fredbar Limited, which we covered in June of this year, resulted in a completely different outcome.
