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Franchise Advisory - The Bribery Act
The Bribery Act has been passed into law subject only to the making of the necessary order. Inevitably the tough new regime introduced by the Act raises the prospect of UK companies, particularly multi-nationals facing more aggressive investigations and fines potentially running into tens of millions of pounds. In the words of the Financial Times, “reputations and profits will be threatened if companies fail to show they have set up and followed, adequate procedures to prevent bribery”.
Section 7 of the Act creates a new strict liability offence for companies and partnerships of failing to prevent bribery occurring within their organisation. It is the Section 7 offence that could apply in a franchising context and which this note will consider.
The only defence to a prosecution under Section 7 is if a franchisor has put in place adequate procedures designed to stop corruption. Unfortunately, what constitutes “adequate procedures” is not defined in the Act. Formal guidance will be provided on this during the course of 2010. The bribery prohibited by the Act applies whether it takes place in the UK or elsewhere, provided that the business, which is being prosecuted, carries on business in the UK.
The elements of the Section 7 offence are:-
(a) a person associated with the franchisor;
(b) bribes another person intending:
- to obtain or retain business for the franchisor; or
- to obtain or retain an advantage in the conduct of business for the franchisor.
The Act defines an “associated” person as one who performs services for or on behalf of the person being prosecuted. What “performing services” means is vague. The Act indicates that it will be determined by reference to all of the relevant circumstances! Whenever there is scope for uncertainty it makes sense to err on the side of caution but just how serious a risk is it that franchisors could be liable for the acts of their franchisees? One franchise lawyer very publicly demanded that the British Franchise Association should be involved because of the seriousness of the risk. We do not agree.
Generally speaking franchisees do not perform services for or on behalf of the franchisor, but instead perform services for or on behalf of themselves and so will not be “associated”. An obvious exception to this is where franchisors obtain national account contracts or require customer contracts to be entered into between the franchisor and the ultimate customer and franchisees perform those contracts as agents of the franchisor. This is a relatively unusual arrangement and much more common is where franchisees perform national account work as the franchisor’s sub contractors. In our view it is unlikely (but not impossible) that sub contractors would be treated as “associated” persons.
Crucially clause 7.1 of the Act sets out two further alternative requirements for the offence to be committed. The first is that the franchisee (if it is an “associated” person in the first place) makes a bribe with the intention of obtaining or retaining business for the franchisor. Franchisees generally obtain and retain business for themselves and the franchisor benefits from it but it is unusual for franchisees to obtain or retain business for the franchisor. Where this could happen is where franchisees obtain national account work for their franchisor or obtain customers who will contract directly with the franchisor.
Alternatively the franchisee (if it is an “associated” person in the first place) has to make a bribe to obtain or retain an advantage, “in the conduct of business for [the franchisor]”. It is not clear what, “in the conduct of business” seeks to add. Is it a reference to the conduct of the franchisee’s business or a reference to the conduct of the franchisor’s business? If the latter, clearly franchisees are not usually involved in the conduct of the franchisor’s business. If the former, then the words do not appear to add anything. Assuming the worst case scenario and it is the former interpretation that prevails, the question is whether if a franchisee obtains a contract by bribery and that contract is entered into by the franchisee on which the franchisee pays continuing fees to the franchisor, this would result in the franchisor obtaining “an advantage”. The short answer is that it is unlikely but “it might”.
Our view is that the Act is only likely to apply if a franchisee obtains national account work for its franchisor or contracts are entered into directly between a franchisor and its franchisees’ customers in respect of which the franchisee performs services as the franchisor’s agent. In practice, this is a pretty unlikely situation! Nevertheless, we would suggest the following precautionary steps be taken:
- If your franchise involves national accounts or you require contracts to be entered into with you obtain specific advice;
- Insert a prohibition on bribery in your Manual along with a procedure for dealing with bribery issues;
- Send a formal notice to all franchisees stressing that bribery is wholly unacceptable and will, if found, result in the immediate termination of their franchise agreement;
- Insert a specific prohibition on bribery (and other relevant provisions) in your franchise agreements;
- Monitor the publication of the guidelines on what constitutes “adequate procedures”.
If you have any queries please contact John Pratt on 0121 237 2020 or john.pratt@hplaw.co.uk