We have learned that the House of Lords has refused an application by franchisor Fleet Mobile Tyres to appeal against a controversial decision by the Court of Appeal which allowed a franchisee to terminate its franchise agreement following a forced re-branding by the franchisor.

Background

The franchise business of mobile tyre fitting was initially primarily carried out under the brand name Fleet Mobile Tyres, although the franchise agreement did refer to the franchisor's other trading name - eTyres, which was run via the internet. The franchisor then decided to concentrate on the eTyres brand.

The franchise agreement entitled the franchisor to deduct a 5% management fee and a 1% marketing fee from the franchisee's total gross sales. However, the franchisor deducted additional sums from the eTyres work for credit card charges and the cost of setting up and supporting the website before paying the remainder to the franchisees. The franchisor also tried to force all franchisees to re-brand to eTyres.

The Court of Appeal held that the franchisor was in breach by:

1.

Deducting more than the contractual 6% from eTyres work.

2.

Changing the brand focus. Brand recognition is clearly a crucial aspect of the franchise which is purchased by a franchisee. By inhibiting the promotion of the Fleet Mobile Tyres brand by the franchisee, the franchisor was substantially impairing the franchisee's enjoyment of the rights granted under the franchise agreement and was therefore "derogating" from the rights granted to the franchisee. Derogating from grant means that the franchisor cannot take away with one hand what it is giving with the other.

Both of these breaches were so fundamental that they entitled the franchisee to terminate.

What does this mean for franchisors?

This decision does not necessarily mean that franchisors will never be able to change their brand names or business focus. One key point in this case was that the work carried out under the eTyres brand was less profitable to the franchisees. If it had not been, it is unlikely that the court would have reached the same conclusion. However, it does show that franchisors must tread very carefully when planning to take such decisions by properly considering the impact on their franchisees' businesses and taking proper advice from franchise law specialists. Failing to do so could be a very expensive mistake, as Fleet Mobile Tyres found out.

Although English law will not imply into a franchise agreement an obligation on a franchisor to act fairly or reasonably towards their franchisees, this case also shows that the courts can look beyond the strict wording of a franchise agreement and utilise less known legal principles in order to protect what the court considers to be the "innocent" party.

For a more detailed analysis of the case and its potential impact on franchisors, please click here to view an article by Mark Abell and Victoria Hobbs on the case first published in the February 2007 edition of Franchise World.

For more details, contact Mark Abell or Victoria Hobbs.