The issues discussed in the MMP GmbH v Antal International Network Ltd 2011 case, although arisen in a franchisor – franchisee situation, can be generalized to apply to a number of commercial contracts  regarding the drafting of termination clauses. These are (i) whether an employee's misconduct is attributable to the employer; (ii) whether the other party’s employee’s misconduct allows the other party to terminate the agreement and how to draft such a clause; and (iii) how such a clause must be drafted to allow a party wishing to rely on breach of a substantial term for lawful termination.

How to draft a clause that allows for termination for breach:

So if you have entered into an agreement containing the right to terminate for breach, you should check your agreements to ensure that clauses which restrict a party’s conduct damaging to the other party’s intellectual property (and do not forget to expressly include brand and goodwill) are sufficiently flexible to allow for this to be in the party's reasonable opinion. Parties in contracts should also ensure that they implement adequate procedures to minimise the risk of employee misconduct for example by adopting internal policies and having written statements.

When interpreting contracts, the courts will consider a variety of factors, ranging from the meaning of technical words to taking into account the commercial context in which a contract was made, in order to arrive at a commercially sensible construction whenever possible. However, the first assumption in the interpretation of contracts is still that the parties have intended what they have in fact said, so the courts will interpret their words as they stand.   

Franchisors should take the opportunity to carefully review their agreements to ensure that there is sufficient flexibility in the drafting of restrictions on the franchisee associated with protection of the franchisor's brand and reputation (a key consideration for a franchisor) to allow for immediate termination when these obligations are breached, if that is the desired outcome.

Wording such as "in the reasonable opinion of Antal" or "(MMP) shall not at any time, do anything that would or is likely to or might adversely affect our name, Trademarks or other Intellectual Property" may be appropriate.This approach means the franchisor would not have to wait for damage to the brand to occur, nor have to put forward evidence of this, which would be too late for a franchisor (as its brand would have been damaged). In addition franchisors should expressly refer to reputation, brand and goodwill in such clauses, if that is what they are seeking to protect.

Franchisees should also be aware that their employees' conduct could be attributable to them, even when, on the face of it, employees are acting in the capacity of their private lives and outside of business premises or working hours. While it is not easy for a business to protect itself against employee misconduct, the fact that a franchise can be lost through such employee misconduct is a serious consideration, and businesses should implement what procedures and policies they can to minimise such risk such as, for example, putting in place processes to ensure that personal data is correctly collected, stored and processed and ensuring that confidential information is securely and separately kept, then destroyed or returned when no longer needed.

How to calculate damages 

In MMP GmbH v Antal case which we reported in our previous article and which highlighted  drafting of termination clauses issues, the High Court also considered whether the appropriate measure of damages in a breach of contract case was the loss of profits or the diminution in the value of the company at the date of the breach.  

The High Court has held that the appropriate measure of damages in a case of breach of contract will usually be the loss of profits, except where it is not possible to apply that test because, for example, the business in question has ceased to trade as a result of the breach. He found that there had been no repudiatory breach by MMP. Therefore, in terminating the contract, Antal had itself committed a breach of contract which deprived MMP of the franchise. However, that breach did not result in MMP closing down or being sold; rather, MMP had continued to trade. In those circumstances, placing MMP in the position it would have been in if the contract had not been breached required the court to assess whether the company's net income since the breach, was less than the net income would have been if the agreement had continued (that is, the loss of profits).

The judge held that it was only when it was not possible to assess damages on the loss of profits basis that the court would fall back on seeking to value the company at the date of the breach. The judge noted that there was little authority on the issue raised by MMP's approach to quantum. In his view, there were two fundamental objections to MMP's approach:

·         An assessment of damages on the basis of a valuation of the company at the date of breach was essentially a hypothesis on a hypothesis. It involved considering the hypothetical value of the company at the date of the breach on the hypothesis that it had ceased doing business on that date.

·         It failed to take account of the fact that, despite the breach, the company was continuing to do business and had the potential to be profitable.

Since MMP had chosen not to plead an alternative measure of damages in the form of loss of profits (despite being warned that, in those circumstances, its case would stand or fall on whether valuation of the business at the date of breach was the correct measure of damages) and since the judge had concluded that the measure pleaded was not the correct measure, MMP was unable to establish that it had suffered any loss. 

Even if the judge had concluded that MMP's approach was the correct measure of damages, the quantum of damages specified was hopelessly speculative and over-inflated. In the judge's view, any prospective purchaser of MMP who had conducted a due diligence exercise would have been unlikely to be willing to pay any money for it. It followed that the claim failed. 

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