Two sets of new consumer laws are set to have an impact on franchisors that deal with consumers either directly or through their franchisees. The two pieces of legislation make substantial changes to consumers contractual rights. As a result of these changes, franchisors must ensure that both they and their franchisees comply with these new consumer laws. We therefore recommend that franchisors update both their standard consumer agreements and consumer facing procedures accordingly and ensure that their franchisees do the same.
Whilst franchisors do not have vicarious liability for the failure of their franchisees to comply with the new laws, a franchisor’s failure to inform his franchisees of them and/or a failure to change the business format and any standard consumer facing documentation used by franchisees, is likely to expose the franchisor to liability as regards any of its franchisees that encounter problems with consumers under the new regulations. In addition where franchisees fail to comply with these legislative changes, this will ultimately impact negatively on the franchisor's brand and reputation.
In this article, we provide an overview of the main changes covered by both sets of regulations. In summary, the first set of regulations will apply to all franchisors and franchisees who enter into contracts with customers either online or face-to-face in places other than their own business premises. The second proposed legislative development is a wide reaching project aimed at clarifying, updating and consolidating a large proportion of existing consumer facing legislation.
- The Consumer Contracts Regulations 2013
The first set of legislative changes is brought about as a result of EU law – namely the Consumer Rights Directive. The UK and other EU Member States were required to implement the Directive by December 2013 and apply the legislation to consumer contracts concluded on or after 13 June 2014. Most of these requirements have been implemented in the UK by the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013 (the "Regulations").
Whilst the Regulations contain provisions that will be relevant to all types of franchise businesses that deal with consumers, they will have a particular effect on the protections available to those which sell to consumers either;
- using the internet or other means of distance communication. These are referred to as "distance contracts"; or
- in a location other than a store or other workplace of the trader ("off-premises contracts"). To this end they update and replace two pieces of familiar pieces of consumer legislation – the Distance Selling Regulations and the Off Premises Regulations.
Under the Regulations, with effect from 13 June 2014:
- Pre-contract information: The Regulations place obligations on all franchisors and their franchisees to provide consumers with the pre-contractual information specified in the Regulations, prior to entering into any contract (for example, on the total costs of the relevant products/services, and the arrangements for payment and delivery). For distance and off-premises contracts franchisors and their franchisees must give the consumer confirmation of the contract, including the pre-contract information, in a durable medium within a reasonable period (and no later than delivery of the goods or commencement of the services, as applicable).
- Placing an order: Where orders are placed using the internet or other electronic means, the franchisor or its franchisees (depending on who is responsible for operating the internet or online channel) must clearly label the order button to indicate that placing the order entails an obligation to pay the franchisor/franchisees (e.g. by using words such as "order with obligation to pay").
- Cancellation rights: For distance and off-premises contracts, the period in which a consumer can voluntarily withdraw from the contract without giving any reasons (known as the "cancellation right" or "cooling-off period") is increased from 7 working days to 14 calendar days. In relation to goods, this period commences when the consumer receives possession of goods, and for services it commences on the conclusion of the contract. Where a cancellation right exists, the franchisor or its franchisees must also provide or make available to the consumer a cancellation form containing the information prescribed in the model form contained in the Regulations.
- Refunds: If the consumer exercises the cancellation right, the franchisor or its franchisees must reimburse all payments received from the consumer, including delivery charges (other than to the extent the consumer chose a more expensive delivery service than the least expensive offered by the franchisor or the franchisee). Refunds for goods must in general be made within 14 days of the day on which the franchisor or its franchisees receive the goods back, and for services they should be made within 14 days of being informed of the consumer's decision to cancel.
- Returning goods: When a consumer exercises a cancellation right, they will generally now be required to return goods within 14 days of notifying the franchisor or the franchisees of the cancellation, although franchisors and their franchisees should still specify if the consumer should bear the cost of returns.
- Delivery and risk: In the absence of any agreement between the franchisor or its franchisees and consumers, the franchisor and its franchisees should deliver goods without undue delay and in any event within 30 days. The goods remain at the franchisor’s/ franchisee’s risk until they pass into the possession of the consumer.
- Inertia selling: Franchisors and their franchisees will be subject to additional controls to protect consumers against 'inertia selling' and other additional charges. Franchisors will need to ensure that they themselves or their franchisees have the consumer's express consent before imposing any charges in addition to the remuneration agreed for the franchisor's/franchisee's main obligations (and will not be entitled to use pre-ticked boxes and the like as evidence of that consent).
- Help-line charges: Any help-line allowing consumers to contact the franchisor or its franchisees in relation to a contract the consumer has entered into with them must not be charged in excess of the basic rate. This provision applies to all types of sales contracts.
New Rules on Digital Content
The Regulations also introduce a new regime specific to "digital content" – i.e. “data which is produced and supplied in digital form”.
They key differences are:
- In all contracts (i.e. irrespective of whether made via distance communication, off-premises or at the franchisor's/franchisee's workplace), franchisors and their franchisees are obliged to provide additional pre-contractual information concerning the functionality of the digital content (for example, region restrictions, DRM and other technical protection measures) and any relevant information about its compatibility with other hardware or software.
- For distance and off-premises contracts, the requirements for the consumer's cancellation right will be different dependent upon whether the content is downloaded or provided on a tangible medium. If the content is downloaded, the Regulations provide that the franchisor or its franchisees must obtain the express consent from the consumer to waive the cancellation right. If this consent is not obtained, the franchisor and its franchisees should not enable the consumer to download the software until the end of the 14 day cooling-off period. If the software is provided on a CD or other tangible medium the cancellation period usually ends at the end of 14 days after the day on which the goods come into the physical possession of the consumer. However, there is an exemption which applies to contracts for the supply of sealed content (such as audio or video recordings or computer software). Here, the cancellation right will be lost if the consumer unseals the goods after delivery.
- The Consumer Rights Bill
The changes effected by the Regulations as a result of the EU Consumer Rights Directive coincide with a separate UK-specific review of consumer protection laws. The result of this review – the Consumer Rights Bill – was introduced to the House of Commons on 23 January 2014 in the first stage on its journey to be brought into law (although it is not as yet confirmed how long this journey will take).
The Bill seeks to codify consumer law that is currently set out in a number of fragmented (and sometimes inconsistent) pieces of legislation, some of which are a number of decades old. In particular, it introduces consistent definitions of key concepts (such as who classifies as a 'trader' or 'consumer'), introduces new statutory rights and remedies for consumers, and updates and modernises the law in certain areas (in particular in relation to digital content).
Some of the key amendments proposed in the current drafting of the Bill are as follows:
Rights and remedies – goods
The pre-contractual information required by the Regulations (see above) will be given contractual effect by being deemed to form implied terms in the contract with the consumer (alongside the existing implied terms such as the requirements that goods be of satisfactory quality, be fit for a particular specified purpose and match their description).
The Bill sets out a series of tiered remedies for the consumer in the event the consumer's statutory rights are breached. In essence these comprise:
- A short-term right to reject the goods, lasting 30 days. If the consumer requests that the goods be repaired or replaced (see below), on return of the goods the consumer will retain this right for the remainder of the 30-day period (extended by the time taken to repair or replace) or 7 days from the date of return (whichever is longer).
- The consumer may also require the franchisor and its franchisees to repair or replace the goods at the franchisor's/franchisee's cost, and within a reasonable time and without causing significant inconvenience to the consumer (although the consumer cannot enforce this right if the repair or replacement would be impossible, or the costs required would be disproportionate compared to the consumer's other remedies). If the franchisor or its franchisees refuse to repair or replace the goods or is unable to do so at the first attempt, or if the consumer cannot enforce this right as it would be impossible or disproportionate, the remedies move on to the next tier.
- The next tier is a right to an appropriate price reduction (up to the full price paid by the consumer), or a final right to reject. The final right to reject is subject to a right of deduction for use, to take into account the use the consumer has made of the goods since they were delivered.
If the franchisor or its franchisees have failed to supply pre-contractual information required by the Regulations, the foregoing remedies do not apply but the consumer can instead recover costs incurred by the consumer as a result of the franchisor’s or its franchisees’ breach, up to the value of the price paid by the consumer.
Rights and remedies – digital content
Under the current law there is potentially a wide discrepancy in the treatment of digital content, depending on whether it is downloaded or provided in tangible form. The Bill differentiates digital content from goods and services, and sets out a separate regime of rights and remedies. These will apply both to paid-for content (including where paid for with 'virtual' currencies) and content that is provided free with paid for goods, services or other digital content.
The Bill proposes that certain terms should be implied in any contract with a consumer for the supply of digital content, including:
- it is of satisfactory quality
- it is fit for a particular purpose notified in advance by the consumer
- it meets any given description
- the franchisor/franchisee has the right to supply the content.
If digital content does not satisfy these requirements, a consumer will not have the right to reject it but instead will have:
- the right to repair or replacement of the content (although, as with the rules for goods, this right is subject to proportionality qualifications to take into account the value and significance of the digital content compared to the costs to repair or replace it). Unlike with the rules on goods, the franchisor and its franchisees are not limited to one attempt to repair or replace the content, provided they can do so within a reasonable time and without causing significant inconvenience to the consumer;
- the right to a price reduction of an “appropriate amount” up to the full price paid if repair or replacement is not possible, or the franchisor or its franchisees has failed to repair or replace the content within a reasonable time and without significant inconvenience; or
- the right of a refund, but only in cases where the franchisor or franchisee is in breach of the statutory warranty that it has the right to provide the content.
The Bill also contains an additional compensation mechanism where digital content causes damage to a device or other digital content owned by a consumer (e.g. through a virus). If that damage would not have occurred had reasonable care and skill been exercised by the franchisor or franchisee in the provision of the digital content, the franchisor or franchisee must either repair the damage (within a reasonable time and without significant inconvenience) or failing that pay compensation - this payment would be required to cover the cost of replacing the device and/or any digital content that is damaged.
Rights and remedies – services
In addition to a requirement that franchisors and franchisees must perform services with reasonable care and skill (that mirrors the requirement in existing legislation), the Bill introduces new implied terms that a consumer must only be obliged to pay a reasonable price for the services and the franchisor or franchisee must perform those services in a reasonable time (unless the price or time for performance have been fixed in advance).
The Bill also proposes new remedies for services which do not comply with the statutory safeguards, including:
- a right to require repeat performance of services that are not performed with reasonable care and skill or in line with information provided by the franchisor and its franchisees or, if that is not possible or done within a reasonable time, a right to a price reduction; and
- a right to a price reduction if services are not performed within a reasonable time.
Unfair terms and excluding liability
The Bill proposes to consolidate the provisions on consumer protection that are currently set out in the Unfair Contract terms Act 1977 (UCTA) and the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCRs). The parts of UCTA that relate to issues other than business-to-consumer contracts will remain in force, but the UTCCRs will be revoked in their entirety.
Franchisors and their franchisees should note that under the proposals they will not be able to exclude or limit the application of the remedies for faulty goods and digital content. It will be possible for them to limit their liability for the new implied terms for the supply of services in respect of price and time for performance, provided they do not prevent the consumer from being able to recover the full contract price (and any other limitations would be subject to a test of fairness). Liability for breach of the implied term that the services will be provided with reasonable skill and care cannot be excluded or limited.
These legislative changes will affect all franchisors and franchisees who contract with consumers, and will have a particular impact on those who deal in distance or off-premises contracts, or with digital content. Franchisors should review their standard terms and conditions together with their contracting procedures and any contracting procedures recommended or imposed on their franchisees to ensure that they are compliant with the new Consumer Contracts Regulations which came into effect on 13 June 2014. The timetable for implementation of the Consumer Rights Bill has not been finalised, but it would be wise for franchisors to become familiar with the proposed changes, as they are likely to have a substantial impact on their business and their franchise networks.