Why franchisors need the strength of good professional indemnity insurance around them

The case for watertight independent professional indemnity (PI) insurance for franchisors is being reinforced with each new legal testing of the relationship between them and their franchisees.

A number of high profile court battles have illustrated very clearly that franchisors can no longer rely on the fundamentals of the franchise agreement, no matter how tightly they think their lawyers have buttoned it up.

Because awards in court cases - up to £150,000 in some instances - are only the tip of the iceberg. Without the armour of PI, franchisors can be saddled with unbearable costs and expenses, not to mention the unquantifiable cost of reputational damage.

It is perhaps hardly surprising, in these litigious times, that instances which might previously have been hammered out by full and frank discussions between the protagonists now end up under the judicial microscope.

The franchisor/franchisee relationship is quite unusual in business and has to be carefully nurtured on both sides. It is quite unlike the relationship between head office and a branch manager, where one side issue orders and the other implements them.

With a franchise, the deal is between an established entrepreneur and a would-be entrepreneur. The latter is buying into the former's vision and, in return for his franchise fee, has a reasonable expectation that the spoils he is promised will materialise in good order.

There are innumerable reasons why that might not happen, not least failings on the part of the franchisee. But if a franchisee fulfils all his obligations and duties under the agreement, and success does not timeously follow, he might start asking awkward questions, such as: was his training adequate; was there misrepresentation of the figures; and was the franchisor in any way negligent in term of the business template?

In this case, the franchisor may find that the £300 to £400 pa cost of PI premiums is about to pay off in spades. Because once a dispute ends up in court, there is no telling which direction it will take.

In one dispute just over a year ago, the franchisor accepted that it would be liable for any statements made fraudulently, but the judge decide that it was also liable for any failure of duty of care.

A duty of care arises between claimant and defendant where there is a sufficiently close and proximate relationship between them (the judge clearly felt that a franchisor/franchisee relationship fitted the bill here) and where it is fair and reasonable that the defendant should have a duty of care.

It might be expected that disputes of this nature, requiring cast iron professional indemnity on the part of the franchisor, would become more frequent as franchises expand and the attention of the franchisor is divided among ever greater numbers of franchisees.

In fact, they can arise every bit as frequently in the early growth stages, when the franchisor is effectively still refining his business model and the franchisee, to some extent, is fulfilling the role of guinea pig.

The BFA is conscious of the need for effective PI insurance for franchisors and has teamed up with Moreland to facilitate special, cost conscious packages. These are made possible by insurers' recognition of the BFA's strong commitment to the principles of ethical franchising.

In an ideal world, differences of opinion and disputes about strategy could be resolved by open and transparent discussions, with the guiding principle being a fair shake for all.

But, human nature being what it is, franchisors would be well advised to make sure they have the strength of high quality PI around them. After all, you didn't build a business just to have someone else cost you your house.