Understanding Franchising Law: Top 5 Issues to Consider

13/04/2019 09:30 | Legal issues in franchising

Franchise law article

Originally uploaded on 17/10/2017. Updated on 13/04/2019.

The franchising industry is huge. According to the BFA-NatWest franchise report 2018, 710,000 are currently employed by an estimated 48,600 franchised units across the UK. In fact, the number of franchise outlets has doubled in the past 25 years, demonstrating the significant growth of the industry. More and more people are recognising the benefits of starting a business with the support of a franchise, and those who have already taken the plunge are keen to do it again, as a third of franchisees run more than one franchised unit. There are many advantages to the franchising model, but in a time when workers are demanding more flexibility, the ability of nearly 40 percent of franchise systems to be run from home is a huge plus point. Therefore, franchising is an increasingly popular way for businesses to expand or begin international growth.

However, there are no laws regulating franchises in the UK. Because the franchise model can be extremely complex for all parties involved, franchisors and franchisees should always consult a franchise law firm for specialised guidance before they embark on their franchising journey. Franchise lawyers will be able to interpret the exact role, responsibilities and obligations that youll be signing up to when you join a franchise. This will remove any confusion and ensure that all relevant documentation and contracts are clear and fair for everyone concerned. This stands all parties in good stead and reduces the risk of nasty surprises further down the line. Only when you fully understand the terms of the franchise agreement should you sign it.

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Are there any relevant laws?

Although there are no specific franchise laws, there are areas of UK general law that apply to franchise agreements. These typically reference misrepresentation, competition and restraint on trade. Lets take a look at these laws in more detail.

1. Misrepresentation

There are no disclosure obligations for franchisors entering into a franchise agreement. However, franchisees can take action if they feel they have joined a franchise as a result of false information provided by the franchisor.

For this reason, its important that franchisors and franchisees understand the impact that inaccurate claims in the Franchise Disclosure Document (FDD) can have on their relationship. Franchisors should ensure that their information is correct, and franchisees should question any aspects of the FDD that they are unsure about.

2. Competition law

The Competition Act 1998 prohibits franchisors from entering agreements that restrict, distort or prevent competition in the UK. The main competition law issues relating to franchising are:

Pricing controls The franchise agreement cannot dictate minimum prices for products or services. However, short-term promotions are allowed.

Exclusivity It is common to be granted an exclusive territory in franchise agreements, but while this exclusivity stops franchisees from selling their products or services in a different territory, franchisees should still be permitted to make passive sales i.e. sales which have not been initiated by them. The European Commission categorises online sales as passive selling, so a franchisor cannot stop a franchisee selling its products or services online.

The complexity of the Competition Act 1998 demonstrates the need to seek professional advice before signing a franchise agreement.

3. Restraint of trade

Franchise agreements usually prevent franchisees from opening similar businesses in the local area during the term of the contract with the franchisor and for a set period after. This clause protects the franchisor as experienced franchisees cannot set themselves up as competition.

In the eyes of the law, a contractual provision like this is difficult to enforce, but if the rule is breached, the franchisor could take legal action. In such cases, the franchisor seeks compensation and a court would assess whether the restraint of trade is reasonable and able to be upheld, considering timings and the geographical range.

4. Anti-bribery

The Bribery Act 2010 makes failure to prevent bribery a corporate offence. If found guilty, a franchisor could face unlimited fines and up to ten years in prison.

5. Data protection

The Data Protection Act 1998 influences when and how businesses collect, store and transfer personal data. This is particularly relevant for customer-facing franchises. In these businesses, a franchisee is usually responsible for collecting and managing data for the franchisor. Using the data inappropriately can cause irreperable damage to the franchise brand and result in hefty fines.

What specific franchise rules are there?

While there are no UK laws relating to franchises, the British Franchise Association acts as a governing body by identifying the most profitable and trustworthy franchises. Potential franchisors are assessed with reference to the associations Code of Ethical Conduct before they can achieve membership status and are regularly re-accredited to make sure that they still comply with it. If franchises dont uphold the required ethical standards, their BFA membership status is withdrawn. This can hugely impact a franchises credibility and reputation.

What are the standards expected of BFA franchises?

There are four main principles at the core of the BFA accreditation. Franchisors must be able to prove that their franchise business is:

  • Viable Products must be marketable, making the business profitable enough to support a franchise network.
  • Transferable The transfer of knowledge and experience is crucial for a franchise to be a success, so the franchisors ability to share information must be demonstrated.
  • Ethical The franchise must comply with the European Code of Ethics for Franchising. The BFA will review the business to decide whether ethical principles have been applied to key areas such as advertising and recruiting and interacting with franchisees.
  • Disclosed All relevant data, statistics and figures must be made available to prospective franchisees in a clear and unambiguous way.

Although the BFA doesnt stop substandard franchises from trading, it can give external entrepreneurs a good idea of the quality of the franchise; i.e. if a franchise is BFA-accredited, the entrepreneur can be confident that it is a high-performing and efficient business. This should mean that the good franchises are approached by more prospective franchisees and customers than the bad ones.

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