home / a lesson in the importance of proper inter-company licences 

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".

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".

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.