Issues Affecting Franchising in the UK

Unlike in some other countries, there is no franchise specific legislation in the United Kingdom. As a result, franchise agreements are often quite lengthy, because they are drafted to cater for all eventualities.

This blog focuses on some of the issues a ‘would be’ franchisor should be aware of when thinking about franchising in the UK.

British Franchise Association (“the BFA”)

Due to the absence of franchise specific legislation, the BFA plays an important role in the regulation of franchising. The BFA requires its members, be they franchisors, affiliates or consultants, to adhere to a Code of Ethics (“Code”). The Code requires a franchisor to have successfully operated a business concept for a reasonable period of time and to be the owner or have the legal right to use the intellectual property rights (trade name and trademarks).

A franchisor has to provide advance disclosure of certain information and both parties are required to exercise fairness in their dealings with one another. This is the case despite there being no general obligation in the UK to exercise good faith in contractual relations. Membership of the BFA, which is voluntary, is a hallmark of accreditation and demonstrates at the very least that the franchisor has complied with best practice. A High Court case recently held that compliance with the Code is a good indicator of what is regarded as fair practice in the industry.

Trade marks

Intellectual property rights are the ‘lifeblood’ of a franchise. The franchisor’s trade name and trademarks, confidential information and know-how are essential elements of what is provided to the franchisee. Trademarks are registerable in the UK under the Trade Marks Act 1994 which provides protection against unauthorised use.

Unfair Contract Terms 1999 (“UCTA”)

Most franchise agreements contain exemption clauses, which seek to limit or exclude the franchisor’s liability for pre-contractual statements, for example when supplying projected profit turnover figures. In assessing the enforceability of such clauses, one must have regard to UCTA, which will apply where the franchisor seeks to limit or avoid liability for misrepresentation.

Franchise agreements are likely to be treated as standard form documents, therefore any exclusion clauses will only be valid in so far as they are fair and reasonable. In a recent case, the High Court decided that a franchisor’s exclusion clause did not exclude liability for the tort of misrepresentation and was an unreasonable under UCTA.

Competition law

Franchise agreements are vertical agreements (agreements between undertakings operating at different levels in the production or supply chain) and have the potential to affect competition, particularly if they contain territorial restrictions, pricing obligations or non-compete requirements.

Many franchise agreements may not be caught by competition legislation because they are treated as being of ‘minor importance’ or have been entered into by ‘small and medium-sized enterprises’. They have been exempted from competition laws by the vertical agreements block exemption. Three areas covered by the block exemption are particularly relevant in a franchising context; these are: price, territory (passive/active sales), and non-compete obligations (in-term and post-term).

Most properly drafted franchise agreements contain a provision whereby the franchisor, on receiving advice that its franchise agreement does not comply with EU legislation, can change the agreement so that it does comply.

Data Protection Act 1998 (“DPA”)

The DPA governs the processing of personal information held on living and identifiable individuals and applies to the ‘processing’ of ‘personal data’. A breach of data protection laws can lead to criminal as well as contractual liability. All the obligations under the DPA fall upon the ‘data controller’. In the franchising context, franchisors and franchisees are both usually data controllers, although franchisees are sometimes data processors rather than data controllers.

Bribery Act 2010

Section 7 creates a new strict liability offence for companies and partnerships of failing to prevent bribery occurring within their organisation. This offence could apply in a franchising context. The only defence to a prosecution is if a franchisor has put in place adequate procedures designed to stop bribery. A franchisor should insert a prohibition against bribery in the Manual along with a procedure for dealing with bribery issues.

Trading Schemes Act 1996 (“TDA 1996”)

Franchise agreements should not fall foul of the TDA, because if they do, they will potentially be subject to a “cooling off period”, controls on the contractual provisions and advertising. It is possible, by suitable drafting, to ensure that the Act does not apply.

As will be seen from the above, there are many hurdles for the unwary franchisor to be aware of when thinking about franchising. However, these can be overcome by using a BFA affiliated lawyer, who will be able to guide you through the maze.