|
|
In the recent case of Dream
Doors Ltd -v- Alan and Bernadette Potter
Birmingham County Court upheld a liquidated
damages clause under which the franchisee agreed
to pay Dream Doors fixed damages of £4,000 on
termination of the franchise
agreement.
What is a Liquidated Damages
Clause?
If a franchisor lawfully
terminates a franchise agreement as a result of a
breach by the franchisee, it is entitled to
compensation based on the profits that it has lost
as a result of the termination. However, lost
profits can be difficult to calculate and prove
and this often deters franchisors from issuing
proceedings against former franchisees following
termination.
It is possible to insert a
liquidated damages clause into your franchise
agreement under which the franchisee agrees to pay
a fixed amount of damages if the franchisor
terminates the franchise agreement as a result of
the franchisee's breach. However, unlike in jurisdictions
like Germany where liquidated damages clauses are
common place, they are rare in the UK as they are
commonly regarded as very difficult to
enforce. A liquidated damages clause
is difficult to draft and will only be upheld by
the Courts if it is technically sound.
Liquidated Damages
Clause or Penalty Clause?
In Dream Doors
Ltd -v- Alan and Bernadette Potter, the
franchisee tried to argue that the liquidated
damages clause was not enforceable as it was a
penalty clause.
Under English law, when a
breach of contract has been committed the innocent
party is compensated by being put in the position
it would have enjoyed if the breach had not been
committed. However, the wrong doer must not be
"punished" for breaching the agreement.
For a
clause to qualify as liquidated damages the sum
must be a genuine pre-estimate of the losses that
will incurred by the innocent party as a result of
a breach or termination.
In Dream Doors
Ltd -v- Alan and Bernadette Potter our client
and their accountant put together detailed
information to show that monitoring the departure
of a terminated franchisee and recruiting a new
franchisee would cost in excess of the liquidated
damages amount of £4,000. As a result, it was held
by the Court to be a genuine pre-estimate of the
franchisor's loss. The Judge, District Judge
Sedhev, commented that the liquidated damages
clause was carefully and well drafted and was a
commercial clause in a commercial agreement and
Dream Doors was therefore entirely entitled to
rely on it.
Conclusion
This judgment shows that if a
liquidated damages clause is carefully drafted and
based on a genuine estimate of your costs of
dealing with a termination and recruiting a new
franchisee, it can be a useful tool and should
make litigation quicker and
cheaper.
| |