FRANCHISING IN THE UK
Franchising is complex and involves a variety of different issues. It provides, on the one hand, the possibility for faster expansion for the franchisor and, on the other hand, a better return with lower risk for the franchisee than would otherwise have been possible without the benefit of a strong brand underpinned by a reputed trademark.
To help you understand what is involved in franchising in the UK please see our summary about Franchising in the UK, below. For further information about franchising in the UK, please contact us.
If you are a prospective franchisee looking to enter into a franchise agreement, we offer a franchise report service which we undertake for a fixed fee. The report will highlight any unsual, unfair or unworkable provisions. For a quote, please contact us.
Whether you are an established franchisor with an extensive franchisee network or whether you are just thinking about franchising your business, we can offer you help and assistance at each stage of your development. Our services range from preparing pilot franchise agreements, franchise agreements, trade mark advice to managing and updating your existing agreements, assisting you with franchisee exits and resales and franchise disputes. To find how we can help you, please contact us.
An Overview of Franchising in the United Kingdom
British Franchising Association (BFA)
Franchising in the UK is subject to self-regulation by the BFA in accordance with its code of ethics (BFA Code) (based on the European Code of Ethics for franchising promulgated by the European Franchise Federation). The BFA is a standards-based organization that requires its members to comply with its standards as set out in the BFA Code and technical bulletins. There are no franchise laws in the UK.
The Judiciary’s View
The BFA Code applies only to BFA members but, in Drivertime Recruitment Ltd. re DST Ltd., a case involving the winding up of a franchisor that was not a BFA member, the UK High Court recognized the BFA Code’s importance in assessing the behaviour of franchisors generally.
Initial Requirements for Franchising in the UK
There are no legal requirements to satisfy before offering franchises in the UK save that the BFA requires a foreign franchisor or UK master franchisee to demonstrate that it has successfully operated at least one pilot unit in the UK before starting its franchise recruitment by participating in BFA-sponsored franchise exhibitions. The franchisor or UK master franchise must also satisfy the BFA that it has the right to use and licence the relevant brands.
The BFA Code requires franchise recruitment advertising to be free of ambiguity and misleading statements and references to future possible results must be objective, factually based, and truthful.
When providing financial illustrations, the franchisor should state that the figures are for illustrative purposes and are not guaranteed. The franchisor must state the basis of financial projections. In practice if prospective franchisees are given figures which are not based on the average performance of franchisees or on a clearly stated but reasonable alternative basis, the figures will give rise to a misrepresentation claim which cannot be defeated by contractual language.
The BFA Code requires full disclosure of all information material to the franchise relationship within a reasonable time prior to the execution of binding documents. This is likely to include the business and financial position of the franchisor; the people involved in the franchise company; the franchise proposition; the franchisees; and financial projections.
The BFA also requires that a copy of the BFA Code be supplied to prospective franchisees before execution of a franchise agreement and prospective franchisees’ pre contract deposits should be refunded if the prospect does not proceed with the franchise agreement, although franchisors may retain third-party expenses incurred in connection with the prospective franchisee’s application.
No general legal obligation requires franchisors and franchisees to act in good faith toward each other although it is not uncommon for franchise agreements to impose an obligation on franchisees to act in good faith toward the franchisor. The BFA Code requires both the franchisor and franchisee to exercise “fairness” in their dealings.
The BFA Code requires that the basis of any renewal should be set out in the contract. Five year franchise agreements (which are the norm in the UK) generally contain two “guaranteed” renewals.
The UK Competition Act 1998 (Competition Act) regulates agreements, including franchise agreements, via two main prohibitions. The Competition Act regulates anti-competitive agreements.
The Competition Act prohibits agreements that have an effect on trade and restrict competition in the UK. Offending agreements may, as a result, be void, and the parties may also be liable for penalties of up to 10 percent of their UK income. Third parties that are harmed by such agreements can also claim damages.
The wording of the Chapter I Prohibition is very similar to that of Article 101 of the Treaty on the Functioning of the European Union (TFEU), except that Article 101 (as explained further below) requires an effect on trade between Member States of the EU to apply. An agreement that falls within the scope of Section 2(1) of the Competition Act could also fall within Article 101 and both UK and EU authorities could become involved with the same agreement. A franchise agreement that is exempt under EU law is also exempt under UK law.
EU Rules Overview
EU competition rules apply in the UK. Article 101 regulates anticompetitive agreements.
The European Commission has produced a block exemption for vertical agreements (agreements between businesses at different levels of trade, such as franchisors and franchisees) which sets out its views on what provisions cannot be contained in a vertical agreement if they are to be exempt from Article 101. In addition, the application of the Notice on Agreements of Minor Importance may mean that franchise agreements entered into by businesses with small market shares will not be regulated by Article 101.
Depending on the seriousness of the competition law breach the whole agreement or the offending provisions will be void and substantial fines can be imposed.
EC Rules: Specific Issues
The block exemption prohibits three contractual provisions often found in franchise relationships. The first two are described as “hardcore” provisions, which are so serious that if a franchise agreement contains them it will be void. The first is minimum price fixing although recommended selling prices are permitted. Secondly, franchisors can prevent “active” selling by franchisees in the exclusive territory of another franchisee, or the franchisor, but cannot prevent “passive” selling (“responding to unsolicited requests from… customers”). Using the Internet to market products constitutes passive sales; accordingly, a restriction on Internet use by franchisees is generally not permitted.
Thirdly, although not a hardcore restriction post termination non compete covenants can only be enforced to the extent that they are necessary to protect the franchisor’s know how.
Other Relevant Legislation
Although no franchise-specific legislation exists in the UK, a number of statutes have an impact on franchising. These statutes are briefly reviewed below.
• Trading Schemes Act 1996
The Trading Schemes Act 1996 (1996 Act) was passed to regulate pyramid schemes. The 1996 Act unintentionally regulates franchise agreements because they fall within the definition of trading schemes. The 1996 Act imposes criminal sanctions for a breach of its provisions. Civil consequences also arise. No prosecutions or civil actions have been reported under the 1996 Act. If the franchisor and all franchisees are VAT registered or if a “single tier” scheme franchise is operated the 1996 Act will not apply.
• Data Protection Act 1998
The Data Protection Act 1998 (DPA) governs the processing of personal information. Any business operating in the UK that holds information about individuals is affected by the DPA. A breach of the data protection laws can lead to criminal as well as civil liability. All obligations under the DPA fall upon the “data controller,” who is the person who determines the purpose and the manner in which personal data are processed. Franchisors and franchisees are both usually deemed data controllers for DPA purposes.
The new Data Protection Act will come into force on 25 May 2018. The good news is that it is not too late to ensure that you and your franchise network are GDPR compliant by then. Hamilton Pratt has developed a GDPR pack specifically for franchisors.
• Unfair Contract Terms Act 1977 (UCTA)
UK franchise agreements commonly contain exemption clauses seeking to limit or exclude the franchisor’s liability to a franchisee. The enforceability of these exemption clauses is determined by reference to UCTA, which provides that such clauses in “standard-form” documents are enforceable only if they are fair and reasonable.
• The Bribery Act 2010
The Bribery Act 2010 (Bribery Act) introduced a regime prohibiting the offering or taking of bribes, whether in the UK or elsewhere, and created a new strict liability offence for companies and partnerships failing to prevent bribery within their organization. In theory, franchisors could be liable if their franchisees accept or give bribes. As a result, franchisees must establish “adequate procedures” to prevent bribery.
The UK consists of three separate jurisdictions: England and Wales, Scotland, and Northern Ireland. Franchise agreements should specify which laws govern the agreement if disputes arise:
• Areas of Litigation
UK courts have addressed franchise issues principally in relation to the enforcement of post-termination non-compete covenants and allegations of breach of contract and/or misrepresentation. Post termination non compete covenants are subject to a test of reasonableness. A non-compete obligation that restricts the franchisee for over twelve months is likely to be considered unreasonable in the UK. The geographical scope of the non-compete covenants, should be limited to where the majority of the franchisee’s customers are based.
It may be necessary to restrain the activities of a current or former franchisee. In such cases, courts may grant an injunction. This often arises when a franchisee competes with a franchisor after termination of the franchise. Injunctions can be obtained very quickly.
• Alternative Dispute Resolution
Parties are encouraged to consider alternatives to litigation and indeed most disputes are required to be referred to mediation before recourse is made to the courts.
Other Practical Issues
There are other practical considerations for prospective franchisors and these are described briefly below:
The UK has a “first to register” system for protecting intellectual property (IP), which means that once a trademark is registered, the registrant can stop any other third party from using a mark that is the same as or similar to their mark.
If retail outlets are required, franchisors often lease the property and sublease it to franchisees. This provides the franchisor with control over the outlet because the franchisor will ensure that the sublease terminates. If franchisees lease their trading premises from a third party landlord, a deed of option can be used to oblige the franchisee to assist in the transfer the premises to the franchisor upon termination of the franchise agreement although the landlord is not a party to the deed of option and can always refuse a transfer of the lease to the franchisor.