Franflash: A Lesson in the Importance of Proper Inter-Company Licences
10 June 2010
The recent decision of the High Court in England in
Stream Healthcare v Pitman Education and Training Ltd
serves as a useful reminder that, where a franchisor is a
subsidiary company in a group, it should ensure that there are
appropriate agreements in place with its parent company so that
there can be no doubt that the franchisor has the necessary rights
to enter into franchise agreements.
This case involved the Pitman Group of Companies, which grants
franchises to operate the business of secretarial
schools. Pitman Training Group (PTG) was the principal holding
company of the Group, and PETL (the Defendant franchisor) was a
subsidiary.
PETL was responsible for granting overseas franchises, though
there was no formal agreement to this effect between PTG and
PETL. Nonetheless, PETL entered into a franchise agreement
with Stream (the Claimant franchisee), granting Stream the right to
conduct the Pitman business in certain countries in West
Africa.
In practice, though PETL was a party to the agreement with
Stream, it was a dormant company. All goodwill and
intellectual property rights in the Pitman brand were owned by the
parent, PTG, and it was PTG which fulfilled the franchisor’s
contractual obligations under the agreement, such as providing
materials to Stream. Similarly, all monies paid by Stream
were channelled to PTG.
The Agreement was entered into in October 2005, following which
Stream paid the first of the franchise fee instalments.
However, when there was a delay in setting up in the pilot country,
Nigeria, Stream defaulted on the remaining instalments. PETL
chased for the outstanding sums. Stream then sued PETL,
alleging repudiatory breach, derogation from grant, and a total
failure of consideration.
Failure of consideration
Stream argued that, since PETL had no rights in the Pitman brand
(these being vested in PTG), PETL had provided nothing under the
agreement. As such, Stream argued, there was a total failure
of consideration and therefore the agreement never had legal
effect.
The judge dismissed this claim on a number of
counts. Firstly, although the Nigerian franchise had never
really got off the ground, PTG had provided to Stream a pack of
marketing materials worth £500. This was more than de
minimis, and therefore was “a complete and short answer to the
total failure of consideration point”.
Notably, the judge also held that the PETL was impliedly
authorised by PTG enter into agreements with franchisees.
Taking a practical view, the judge commented that “The whole
set up would otherwise not have worked…[The franchisees] got
sufficient rights to enable them to do what the agreement allowed
them to do”. As such, the failure of consideration claim
also failed.
Lessons learned
It was clear that the judge saw Stream’s arguments as an attempt
to wriggle out of payment. Having reviewed the evidence
thoroughly, the judge easily fell in favour of the
franchisor. The judge had no problem implying the appropriate
agreement between the parent company and its subsidiary to defeat
the “failure of consideration” claim. However, franchisors
should nonetheless be careful to ensure any such agreements between
companies in a group are properly documented in order to avoid
claims of this nature.