The effect of the Brexit vote is not, of course, just about the UK. It affects continental Europe and beyond. Post referendum, the UK is on course to leave the European Union and one of the effects of that will be the need to develop a new relationship with the remaining European member states. The shape of that relationship remains to be seen. What we do know is that nothing is likely to happen for some time to come and it is hoped that businesses, and their advisors, will have plenty of time to anticipate changes in the legal, commercial and economic landscape.
At the time of writing, the formal process of the UK exiting from the EU has not been invoked by the UK government. The timing of the Article 50 notice, the trigger for the exit process, will be a matter for the new Prime Minister and cabinet to determine, in due course. However, assuming that exit goes ahead, many long-term contracts will run throughout what will almost surely be a lengthy period of transition.
Uncertain English law?
The run-up to the referendum saw much talk of "Brussels-made law" and England’s perceived need to regain control of English domestic law. Regardless of the rights or wrongs of that conceptual argument, the reality is that English law, particularly as it relates to franchising, has largely developed independently of the EU and will be less affected by exit than many might think. The UK (England, Wales, Scotland, and Northern Ireland) has no franchise-specific laws, and there are no franchise registration or disclosure obligations that have general application across the EU. In that respect, governing law, jurisdiction and arbitration provisions in longer term development or master franchise agreements are unlikely to be upset by Brexit.
That said, all EU member states have agreed to certain common ("harmonized") laws, generally intended to create a single trading market and to grant common protections to individuals living within the EU. Examples include data privacy and consumer protection laws. Will these fall away when the UK finally leaves the EU?
Much EU-derived law has been enacted by English statute and, initially at least, will remain in force regardless of EU membership. The UK's new trading model might even require adherence to certain EU-derived legislation. (Norway's relationship with the EU works in this way.) If not, the UK government's appetite to repeal legislation which supports trade with the EU, or protects employees or the rights of consumers, remains to be seen.
One possible consequence of the UK's exit from the EU is that England’s common law regime, which is generally favorable to franchising, may in the future be insulated to some extent from pervasive new laws promulgated by Brussels as part of the EU's aspiration to create pan‑EU laws that supersede the domestic laws of member states. One such attempt at this type of pan‑EU law was the Common European Sales Law (since withdrawn by Brussels in favour of measures to remove contractual barriers to cross‑border sales). Another example of laws that have been implemented with pan‑EU effect are the antitrust laws derived from the Treaty for the Functioning of the European Union (which are largely mirrored in the UK's domestic Competition Act). Any pan‑EU franchise law (not that the concept has ever gained much traction) would be unlikely to directly affect the UK, if it were ever to materialize.
Many brand owners who license their brands in the UK as well as other EU member states have their trademarks registered under a single EU-wide trademark registration (an EUTM, formerly known as a Community Trademark, or CTM). What the status of an EUTM will be at the point when the UK leaves the EU is not yet known. There will, however, have to be transitional arrangements put in place that enable franchisors to continue to protect their trademark in the UK post‑Brexit. Whether this will mean that pre‑existing EUTMs will continue to have effect in the UK (either permanently or during a transitional period), or whether there will be some form of automatic translation of a pre‑existing EUTM insofar as it relates to the UK into a UK trademark, or something in between, remains to be seen.
The effect of Brexit on franchising
Franchising in the UK is at an all‑time high. The last 10 years have seen an unprecedented increase in the number of franchise systems. The value of the franchise industry in the UK is estimated to be £15.1 billion, up 46 percent since 2006, and franchisee profitability levels are at the highest level ever recorded, with over half of franchisee businesses turning over more than £250,000 per annum. While there is healthy growth in the B2B sector, B2C systems still account for the vast majority of franchise systems, and one of the fundamental determinants of how Brexit might impact the franchise industry will be the effect it has on consumer confidence.
The Bank of England says it has contingencies in place to support the UK economy as we go into this period of economic and political uncertainty, and the clearing banks that are prominent in the franchise sector in the UK have stated that it is very much business as usual. Nevertheless, there is talk of reducing interest rates even further than the current (very low) levels to stimulate the economy, quantitative easing (the Bank of England pumping additional money into the economy) and of a possible recession, among certain commentators.
At this stage, the UK is still likely more than two years away from exiting the EU, and while it will be prudent to consider the potential implications of Brexit when putting new long-term arrangements in place which are either governed by English law or which cover multiple EU territories including the UK, there is no immediate need to make any knee‑jerk changes to existing legal agreements. It is more a case of business as usual, and a little bit of wait and see, but with an eye on whether any adaptations to a franchisor's business system might be appropriate in due course to reflect the fact that laws and international trading relationships with the UK may change.
In the meantime, what will be crucial for franchising is that consumer confidence holds up, and it is likely that the commercial uncertainty, far more than any contractual uncertainty, will be one of the most important factors to keep under review during the coming weeks and months.