Franchise lawi Legislation
There are no specific franchise laws in the United Kingdom. The franchisor–franchisee relationship is governed by contract law with a number of statutes, voluntary codes and case law affecting both the franchisor–franchisee relationship and the franchise agreement itself. Franchisors who are members of the BFA are obliged to comply and ensure that their franchise agreements conform with the BFA Code of Ethics (the BFA Code) (see below).
The Trading Schemes Act 1996 governs pyramid-selling schemes, and brands seeking to franchise in the United Kingdom should structure their franchising arrangements to fall outside the scope of this act. To be exempt by virtue of the Trading Schemes (Exclusion) Regulation 1997, parties should ensure that: (1)the franchise is a single-tier trading scheme (with a single level of franchisees beneath the franchisor), or (2) the franchisor and all franchisees are registered for VAT, or both of these.ii Pre-contractual disclosure
As a starting point there is no mandatory pre-contractual disclosure requirement in the United Kingdom. This statement, however, is not particularly helpful for ethical franchisors or franchisors wishing to adopt best practice. The BFA Code to some extent enshrines best and recommended practice in relation to pre-contractual disclosure requirements. Members of the BFA are required to disclose certain information in writing to prospective franchisees within a reasonable (not defined) period prior to signature of the franchise agreement. This information includes:
- the business and financial position of the franchisor;
- the main officers of the franchisor;
- details of the franchise business;
- details regarding the franchise network and franchisees;
- any financial projections or historical financial performance data; and
- key terms of the franchise agreement.
With the exception of the BFA requirements there is no statutory or other pre-contractual obligation on franchisors to disclose relevant facts. Generally the principle of caveat emptor or 'buyer beware' applies to the pre-contractual phase of the franchisor–franchisee relationship. The laws of misrepresentation, however, apply to the pre-contractual phase of the franchisor–franchisee relationship. The concept of misrepresentation is enshrined both in the Misrepresentation Act 1967 and common law.
There are two main types of misrepresentation claims relevant to pre-contractual disclosure, which vary according to the level of belief held by the franchisor in the truth of the statement. If the franchisor makes a false statement knowingly, or without belief in its truth, or recklessly as to its truth, then they may be liable for fraudulent misrepresentation. If, however, the franchisor only made the statement carelessly, or without objectively reasonable belief in its truth, then the franchisor may be liable for negligent misrepresentation.
If a franchisee can demonstrate that the franchisor's misrepresentations were statements of fact that induced the franchisee to enter the franchise agreement, as a result of which the franchisee suffered loss, the franchisee will be entitled to seek compensation for the loss. The franchisee may also be entitled to rescind the franchise agreement. Recent case law has shown that the courts are increasingly willing to award substantial damages for misrepresentation by franchisors.
In Peart Stevenson Associates Ltd v. Holland, the franchisor was awarded £20,000 for a breach of contract by the franchisee in relation to overdue payments and post-termination restrictions. The franchisee counterclaimed, however, stating that a number of representations, including those relating to projected turnover and profit, had induced it to enter the agreement and it transpired that the statements had been misleading. The court agreed with the franchisee and awarded £170,000 in damages, vastly offsetting the sum awarded to the franchisor.
Many franchisors use a 'non-reliance' clause in their franchise agreements, which involves either a warranty, undertaking or contractual obligation by the franchisee that no statement has been relied upon other than those contained in the written agreement. Such a clause is stronger if the franchisee is allowed an express opportunity to attach any relied-upon pre-contractual statements to the franchise agreement. It is important to note that non-reliance clauses cannot protect a franchisor against fraudulent misrepresentation, only negligent misrepresentation. Any clause that attempts to exclude liability for fraudulent misrepresentation will be unenforceable under common law as a matter of public policy. In principle, non-reliance clauses in business-to-business dealings are legitimate, but any clause that attempts to limit or exclude liability for misrepresentation or excludes any remedy for misrepresentation is enforceable only to the extent that it satisfies the test of reasonableness under the Unfair Contract Terms Act 1977 (UCTA) (by virtue of Section 3 of the Misrepresentation Act 1967). Whether a particular clause is, in fact, enforceable will be subject to the facts of each case. This is highlighted in the cases of Henry Boot v. Foodco and Papa Johns (GB) Limited v. Elsada Doyley.
The court in Papa Johns v. Doyley (a case involving the provision of financial information and financial performance projections by the franchisor to the franchisee during the recruitment process) examined a number of relatively typical and common boiler-plate provisions in the franchise agreement that are normally designed to protect the franchisor against misrepresentation claims.
Despite case law having largely upheld such clauses in commercial contracts, the court in Papa Johns held the entire agreement and non-reliance clauses to be unenforceable as they failed to satisfy the reasonableness tests under the Misrepresentation Act 1967 and UCTA. The court's findings were largely based on:
- the inequality of bargaining power between the parties;
- Papa Johns' insistence that the agreement was non-negotiable; and
- the standard boiler plate clauses in the franchise agreement had not been brought to Ms Doyley's attention.
In contrast, in the case of Henry Boot v. Foodco (a case that involved performance projections provided by a landlord to franchisee tenants regarding motorway service stations) the bargaining power between the parties was more equal than in comparison with Papa Johns. The court held that the non-reliance clause was enforceable. In this specific dispute the court held that there was 'no doubt' that the clause was reasonable after considering the following factors under UCTA:
- certainty is desirable;
- there was no substantial imbalance of bargaining power between the parties;
- each of the tenants were advised by solicitors;
- the non-reliance provision was open to negotiation; and
- the clause permitted reliance by the tenants upon any replies given to them by Henry Boot's solicitors.
In Lloyd v. Browning, the Court of Appeal endorsed the Henry Boot reasoning under UCTA and stated that the general purpose of a non-reliance clause is to achieve certainty and forestall disputes, and that Henry Boot 'set out the features which are relevant to the assessment of reasonableness' and the approach of the courts in Henry Boot was to be 'endorsed'.
Despite the contrast in outcomes between Henry Boot and Papa Johns it is advisable for international franchisors looking to enter the United Kingdom to ensure that any financial projections regarding the franchisee's business provided in the pre-contractual recruitment phase are not only capable of objective substantiation but are provided in writing with appropriate background information and health warnings. Express non-reliance clauses are important for franchisors' risk management but franchisors must be aware that their enforceability is not always guaranteed, especially in circumstances where the franchisee is an individual or small business inexperienced in commercial matters.
In 2018, the High Court considered statements made by the franchisor's development manager in a franchise arrangement structured through joint-venture agreements in Ali v. Abbeyfield VE Ltd. Representations made by the development manager concerning the suitability of a location, anticipated business projections and success rates of the franchisee businesses were found to be fraudulent misrepresentations in that the defendant, through its development manager, either knew, or was reckless as to whether or not, the representations were false. While this judgement does not change the law in this area, it is a reminder to franchisors to ensure their employees and representatives carefully consider any assurances they give to potential franchisees.iii Registration
There are no registration requirements in the United Kingdom that impact on the franchisor–franchisee relationship or with regards to the franchise agreement itself. There is no requirement to register either the franchise agreement or the trademark licensing provisions as a registered trademark licence agreement.iv Mandatory clauses
There are no mandatory clauses prescribed by statute or case law. Franchisors who are BFA members will need to ensure that their contracts comply with the BFA Code as well as the BFA's Extension and Interpretation of the Code. While the BFA Code does not specify mandatory clauses it does contain a list of terms to be contained in the franchise agreement.
It is therefore important that a UK franchisor or an international business franchising in the United Kingdom who wishes its master or developer to become a member of the BFA has its franchise documentation drafted by advisers familiar with the BFA Code.v Guarantees and protection
In the event that a franchisor contracts with a sole trader then the sole trader franchisee will be personally liable for its performance and payment obligations and therefore a guarantee would not be required. In the event, however, that a franchisor contracts with a partnership or limited liability company franchisee, it is certainly advisable that a franchisor obtains a contractual guarantee from either the primary director or shareholder or partner as the case may be – or more than one key individual if commercially appropriate.
Where the franchise business involves an element of product supply by the franchisor to the franchisee it may also be prudent for the franchisor to request that the franchisee provides a letter of credit from a bank acceptable to the franchisor to cover payment defaults by the franchisee.
Provided that the contractual guarantee agreement is not unreasonable to the extent that it is legally unenforceable, then guarantees from individuals and companies to the franchisor are enforceable.