F2012UnitedKingdom(2)

7/30/2019 F2012UnitedKingdom(2)

1/10

Franchise

in 30 jurisdictions worldwide

Contributing editor: Philip F Zeidman2012

Published byGetting the Deal Through

in association with:

Advocare Law Ofce

Advocatia Abogados

Advokatfrma DLA Nordic

Anderson Mori & Tomotsune

Bersay & Associs

Bowman Gilfllan Inc

BrantjesVeerman Advocaten

DBB Law

DLA Piper (Thailand) Limited

DLA Piper LLP (US)

Drakopoulos Law Firm

Freygner Rechtsanwalt GmbH

Gonzalez Calvillo SC

Hamilton Pratt

Koyuncuoglu & Koksal Law Firm

Lapointe Rosenstein Marchand Melanon LLP

Lee & Ko

Makarim & Taira S

Mason Sier Turnbull

meyerlustenberger

Noerr LLP

Noerr OOO

Noerr sro

ONeill & Borges

Palacios & Asociados

Romero Pineda & Asociados

SBGK Patent and Law Ofces

Stewart Germann Law Ofce

Tian Yuan Law Firm

Wong Jin Nee & Teo


2/10

Intrductin Philip F Zeidman DLA Piper LLP (US) 3

Australia John Sier and Philip ColmanMason Sier Turnbull 5

Austria Sylvia Freygner and Hubertus ThumFreygner Rechtsanwalt GmbH 13

Belgium Pierre Demolin, Benoit Simpelaere, Leonard Hawkes and Vronique DemolinDBB Law 20

Canada Bruno Floriani and Marvin LiebmanLapointe Rosenstein Marchand Melanon LLP 25

China Yanling RenTian Yuan Law Firm 33

Czech Republic Barbara Kusak and Halka PavlkovNoerr sro 41

El Salvadr Jos Roberto RomeroRomero Pineda & Asociados 48

Finland Patrick LindgrenAdvocare Law Office 53

France Emmanuel SchulteBersay & Associs 59

Germany Karsten Metzlaff and Tom BillingNoerr LLP 66

Guatemala Marco Antonio Palacios and Cynthia J SequeiraPalacios & Asociados 73

Hungary Pter Lukcsi and Mt BorbsSBGK Patent and Law Offices 78

Indnesia Galinar R KartakusumaMakarim & Taira S 83

Japan Etsuko HaraAnderson Mori & Tomotsune 90

Krea Jae Hoon Kim and Sun ChangLee & Ko 96

Malaysia Jin Nee WongWong Jin Nee & Teo 104

Mexic Jorge Mondragon and Miguel ValleGonzalez Calvillo SC 111

Netherlands Tessa de MnninkBrantjesVeerman Advocaten 119

New Zealand Stewart GermannStewart Germann Law Office 126

Puert Ric Walter F ChowONeill & Borges 131

Rmania Adrian Roseti and Andra FilatovDrakopoulos Law Firm 139

Russia Thomas Mundry and Natalya BabenkovaNoerr OOO 145

Suth Africa Eugene HoneyBowman Gilfillan Inc 152

Spain Ignacio Alonso MartinezAdvocatia Abogados 160

Sweden Peter Orander and Mikael von SchedvinAdvokatfirma DLA Nordic 168

Switzerland Mario Strebelmeyerlustenberger 176

Thailand Chanvitaya Suvarnapunya and Athistha ChitranukrohDLA Piper (Thailand) Limited 182

Turkey Hikmet KoyuncuogluKoyuncuoglu & Koksal Law Firm 187

United Kingdm Gurmeet S JakhuHamilton Pratt 193United States Michael G Brennan and Philip F ZeidmanDLA Piper LLP (US) 200

Franchise 2012

Contributing editor:Philip F ZeidmanDLA Piper LLP (US)

Business developmentmanagersAlan LeeGeorge IngledewRobyn HetheringtonDan White

Marketing managersEllie NotleySarah WalshAlice Hazard

Marketing assistants

William BentleySarah Savage

Business development

manager (subscriptions)

Nadine [email protected]

Assistant editorAdam Myers

Editorial assistantLydia Gerges

Senior production editor

Jonathan Cowie

Chief subeditor

Jonathan Allen

SubeditorsMartin ForrestDavet HylandCaroline RawsonSarah Morgan

Editor-in-chiefCallum Campbell

PublisherRichard Davey

Franchise 2012Published byLaw Business Research Ltd87 Lancaster RoadLondon, W11 1QQ, UKTel: +44 20 7908 1188Fax: +44 20 7229 6910 Law Business Research Ltd2011

No photocopying: copyrightlicences do not apply.

ISSN 1752-3338

The information provided in thispublication is general and may not

apply in a specific situation. Legaladvice should always be soughtbefore taking any legal action basedon the information provided. This

information is not intended to create,nor does receipt of it constitute,a lawyerclient relationship. The

publishers and authors acceptno responsibility for any acts oromissions contained herein. Althoughthe information provided is accurate

as of September 2011, be advisedthat this is a developing area.

Printed and distributed byEncompass Print SolutionsTel: 0844 2480 112

CoNTENTS

Law

Business

Research


3/10

United Kingdom Hal Pra

192 ge he deal throuh Frachse 2012

Ue Komgurmee S Jakhu

HamiltonPratt

Overview

1 Whatformsofbusinessentitiesarerelevanttothetypicalfranchisor?

Almost all franchisors operate as a limited company apart fromthe limited liability afforded, such companies are often perceived(wrongly) to be more substantial businesses than unincorporated

businesses.It is also possible to set up a limited liability partnership (LLP),

which has separate legal liability and is more akin to a limited com-pany than to a traditional partnership, but these are rare.

The responses provided here are by reference to the legal systemin England and Wales. Scotlands legal system differs in some rela-tively minor respects.

2 Whatlawsandagenciesgoverntheformationofbusinessentities?

A sole trader is not subject to any specific legislation. An LLP isincorporated under the Limited Liability Partnership Act 2000, whilea partnership is subject to common law rules and the Partnership Act

1980 (PA). A company is regulated by the Companies Acts 1985,1989 and 2006. All companies are required to be registered at Com-panies House and are subject to further regulatory requirements,including providing annual returns and accounts (unless they areexempt).

3 Provideanoverviewoftherequirementsforformingandmaintaininga

businessentity.

Sole traders, which tend to be relatively small concerns, are not sub-ject to any specific legislation in terms of formation or maintainingthe business. Nevertheless, they are required to pay income tax onprofits generated by the business.

The PA does not provide a complete code of partnership law.The rules of equity and common law apply except where they areinconsistent with the PA. To satisfy the definition of a partnership,two or more persons must be carrying on a business. The factors fordetermining the existence of a partnership include common owner-ship of property, sharing of gross returns and the receipt of a sharein profits. The existence of a partnership is always a question of fact.Partners are liable for the debts and obligations of the partnershipwithout limit.

A company is formed under the Companies Act by a processcalled registration, which involves submitting at least form INO1 anda fee with the registrar of companies, the official responsible for theregistering and maintaining the records of companies. A companycomes into existence on the issue of a certificate of incorporation.

Details of the registered office, annual returns and accounts mustbe filed with the registrar unless the company is exempt from filingaccounts.

An LLP will also have to be registered with the registrar of com-panies and a certificate of incorporation will be issued. To achieve

incorporation, two or more persons must subscribe their names tothe incorporation documents and pay a fee. The LLPs name mustend with LLP and a statement about the intended location or the reg-istered office must be provided. LLPs will be required to file accountsand annual returns, and to make the relevant notifications regardingany changes to membership and to its registered office.

Companies and LLPs are required to display their companyregistration details and registered office address on their letters andorder forms. The names of all partners have to appear on businessletters and order forms. Sole traders are also required to disclosetheir names on such documents. Further, any business that employsstaff is obliged to have in place, and to maintain, employers liabilityinsurance.

4 Whatrestrictionsapplytoforeignbusinessentitiesandforeign

investment?

UK Trade and Investment (www.ukti.gov.uk) is a government agencythat helps foreign businesses to invest and locate in the UK and grow

internationally. The UK is the fifth largest economy in the world andis one of the easiest places in Europe in which to set up and run abusiness.

There are generally no restrictions on foreign ownership orinvestment in the UK and there is little or no regulation on foreignownership of companies. Foreign franchisors have no difficulty set-ting up in the UK.

Foreign nationals from outside the European Union will need avisa and a certificate of sponsorship from a UK-registered business.The UK now has a points-based system (PBS) and it is for the com-pany to ensure that those it wishes to employ meet the criteria of thePBS. The sponsor is also responsible for its migrant employees andmust report any unexplained absences, etc, to the UK Border Agency.The government has introduced a limit of 21,700 for workers enter-

ing the UK from outside the EU to take effect in 2011-12 across Tier1 and 2 of the PBS.

Among other legislation and regulations, the foreign franchisorwill have to comply with the Data Protection Act 1998 and moneylaundering requirements (for opening a bank account), and account-ing and tax considerations must be taken into account.

5 Brieflydescribetheaspectsofthetaxsystemrelevanttofranchisors.

Howareforeignbusinessesandindividualstaxed?

There are no special tax rules that are applicable to franchisors. Unin-corporated businesses are assessable to tax on a current-year basis,which means the profits for the accounting period ending within the

current tax year are assessed for tax that tax year. There are spe-cial rules for the first and last periods of trading. With partnerships,each partners share of profit, after expenses and capital allowances,is assessed on him individually, using the profit-sharing ratio thatapplies in the accounting period ending in the tax year in question.


4/10

www.eheealhrouh.com 193

Hal Pra United Kingdom

A company is chargeable to corporation tax on its profits by ref-erence to its accounting periods and not tax years, as is the case withsole traders and partnerships. Where a company distributes retainedprofits to its shareholders as a dividend, the shareholder will be liableto pay tax on the net dividend received. Companies are obliged toself-assess their corporation tax liability and are required to submit acorporation tax return with their set of accounts on an annual basis.Failure to do so, or failure to pay the corporation tax in time, may

result in penalties.The tax treatment of the initial fee needs to be given careful con-

sideration. The UK tax system draws a distinction between capitaland revenue expenditure and receipts. Part of the initial fee paymentis usually consideration for the grant of rights to operate the fran-chise, and the balance is usually attributable to goods or servicesprovided to equip the franchisee and to help launch the business.The great majority of the initial fee will be a revenue receipt in thehands of the franchisor.

A foreign business will not be subject to UK tax unless it is per-manently established in the UK, for example, if it had a subsidiaryor branch. If this is the case, the foreign entity may be subject toUK tax.

6 Arethereanyrelevantlabourandemploymentconsiderationsfor

typicalfranchisors?Whatistheriskthatafranchiseeoremployeesof

afranchiseecouldbedeemedemployeesofthefranchisor?Whatcan

bedonetoreducethisrisk?

Any entity that takes on employees will be required to complywith UK anti-discrimination laws, which prevent discrimination ongrounds of sex, race, sexual orientation, disability, religion and age.A franchise agreement will often require that a franchisee complywith all relevant laws and regulations, which include employmentlegislation.

In Autoclenz Limited and Belcher & Others, 2011, UKSC 41,the Supreme Court decided (agreeing with the Court of Appeal) thatthe contractual documents entered into by the parties did not reflectthe true agreement between the parties. It decided that even thoughthe agreements gave the car valeters an option to work, describedthem as franchisees and as independent subcontractors in a contractreferred to as a franchise agreement, the individuals were in realityworkers and were therefore afforded the protection of employmentlegislation. In practice, very few franchisees are likely to be treatedas employees.

7 Howaretrademarksandknow-howprotected?

The franchisors trade name and trademarks, confidential informa-tion and know-how are essential elements of what the franchisorprovides to the franchisee. It is a requirement of the Code of Eth-

ics issued by the British Franchise Association (BFA Code) that thefranchisor either is the owner or [has] the legal rights to the use ofits networks trade name, trade mark or other distinguishing feature(section 2.2).

Trademarks in respect of goods and services can be registered inthe UK under the Trade Marks Act 1994 in specific classes and, uponregistration, provide protection against unauthorised use. It is alsopossible to obtain a Community Trademark that enables the trade-mark owner to rely on a single registration with effect throughoutthe European Union (via the OHIM in Alicante) and an internationalregistration that is filed under the Madrid Protocol administered byWIPO.

It is possible to bring a claim for the tort of passing off, whetheror not a trademark has been registered, if a person seeks to take

advantage of the reputation of anothers goods or services by adopt-ing a similar name or get-up or otherwise implying a link betweenhis product or service and anothers. One has to establish that theinfringer has made a misrepresentation that is calculated to, anddoes, cause injury to the business or to goodwill.

The franchise agreement or operations manual will contain vari-ous provisions with regard to the protection of intellectual propertythat includes confidential information (know-how).

8 Whataretherelevantaspectsoftherealestatemarketandreal

estatelaw?

In England and Wales, land is held by way of freehold or

leasehold.If the business model requires the use of prime retail outlets, then

the franchisor may have to take a lease and grant their franchiseesa sub-lease of the premises, although this is becoming less common.Granting a sub-lease to a franchisee provides much greater controlover the outlet for a franchisor. It is not uncommon for a landlordto require a third party to guarantee the performance of the tenant,particularly where the franchisee is of limited financial means.

If the lease and sub-lease procedure is adopted, it is important forthe franchisor to exclude the lease from the provisions of the Land-lord and Tenant Act 1954, which, if applied, would give a franchiseesecurity of tenure so that the franchisee could not be evicted from thepremises following termination of the franchise agreement.

If a franchisor does not take a lease and grants a sub-lease, a deedof option can be used so as to oblige the franchisee to transfer thepremises to the franchisor on termination of the franchise agreement,subject to the consent of the landlord.

If the franchise agreement contains an option to renew, the leaseshould reflect this.

Laws and agencies that regulate the offer and sale of franchises

9 Whatisthelegaldefinitionofafranchise?

There is no legal definition of franchising and no franchise-specificlegislation. Most reputable franchisors join the British FranchiseAssociation (BFA) (www.thebfa.org), a self-regulatory body. Mem-bership of the BFA is voluntary. The BFA has adopted the EuropeanFranchise Federations definition of franchising, which provides(inter alia):

Franchising is a system of marketing goods and/or services and/or

technology, which is based upon a close and on-going collaboration

between legally and financially separate and independent undertak-

ings, the Franchisor and its Individual Franchisees, whereby the

Franchisor grants its Individual Franchisees the right, and imposes

the obligation, to conduct a business in accordance with the Fran-

chisors concept [...].

10 Whichlawsandgovernmentagenciesregulatetheofferandsaleof

franchises?

There are no specific agencies that regulate the offer and sale of afranchise that is governed by the general law, where the overrid-ing principle is caveat emptor (buyer be aware). A prudent buyershould undertake all necessary due diligence and obtain advice fromBFA-affiliated professionals prior to entering into the franchiseagreement.

11 Describetherelevantrequirementsoftheselawsandagencies.

While not specifically aimed at franchising, certain laws have had animpact on drafting franchise agreements, for example, the Fair Trad-ing Act 1973 and Fair Trading Schemes Act 1996, which regulatespyramid selling, and for competition law see question 39.

Under the Trading Schemes Act 1996 (the 1996 Act) franchisesystems are likely to be treated as a trading scheme and will have tocomply with the 1996 Act, unless they fall under one of two excep-tions (see question 12). The purpose of the 1996 Act is to regulatepyramid selling that arises when distributors are encouraged to or


5/10



discover that it is it more remunerative to find other sub-franchisees(who in turn are encouraged to find sub-franchisees, etc) than tosell the goods or services that are allegedly the subject of the fran-chise. While the 1996 Act does not prohibit pyramid selling, it seeksto control it by regulating three aspects, namely, the control ofadvertising, the imposition of a cooling-off period and the controlof contractual provisions.

12 Whataretheexemptionsandexclusionsfromanyfranchiselawsand

regulations?

Franchisors who operate a single-tier trade scheme are exempt fromthe Trading Schemes Act 1996 if all franchisees operate at a singlelevel (except for the franchisor) or where all franchisees are registeredfor VAT.

See question 39 for further information on Competition Lawissues.

13 Doesanylaworregulationcreatearequirementthatmustbemet

beforeafranchisormayofferfranchises?

There are no such legal requirements, but the BFA Code requires afranchisor to: have successfully operated a business concept for a reasonable

time in at least one pilot unit before starting its franchise net-work. Company-owned units can provide the basis for a pilotoperation, but to gain the right experience the pilot should be runby a manager on an arms-length basis to test the system andinfrastructure;

be the owner or have the legal rights to the use of the networkstrade name, trademarks or other distinguishing identification;and

provide the individual franchisee with initial training and con-tinuing commercial and technical assistance during term of theagreement.

14 Inthecaseofasub-franchisingstructure,whomustmakepre-sale

disclosurestosub-franchisees?Ifthesub-franchisormustprovide

disclosure,whatmustbedisclosedconcerningthefranchisorandthe

contractualorotherrelationshipbetweenthefranchisorandthesub-

franchisor?

Except for what is set out in question 15, there is no specific require-ment for pre-sale disclosure to sub-franchisees in the UK. The BFACode requires disclosure to be made to any prospective franchisee.This includes providing a copy of the Code of Ethics and full andaccurate written disclosure of all information material to the fran-chise relationship prior to the execution of the binding documents.

15 Whatisthecomplianceprocedureformakingpre-contractualdisclosure

inyourcountry?Howoftenmustthedisclosuresbeupdated?

There is no specific legislation that provides for pre-contract dis-closure. Nevertheless, the BFA Code stipulates that advertising forfranchise recruitment must be free of ambiguity and misleading state-ments. Further, where there are direct or indirect references to futurepossible results, figures or earnings to be expected by individual fran-chisees, these should be objective and factually based and must notbe misleading. The BFA also requires its members to refund depositspaid by prospective franchisees if they do not proceed, although it isacceptable to deduct related and verifiable expenses.

16 Whatinformationmustthedisclosuredocumentcontain?

This is not applicable, but see questions 14, 15 and 22.

17 Isthereanyobligationforcontinuingdisclosure?

No.

18 Howdotherelevantgovernmentagenciesenforcethedisclosure

requirements?

When applying for membership of the BFA, applicants must com-mit themselves to comply with the Code of Ethics. See questions 14and 15.

19 Whatactionscanfranchiseestaketoobtainreliefforviolations

ofdisclosurerequirements?Whatarethelegalremediesforsuch

violations?Howaredamagescalculated?Ifthefranchiseecancancel

orrescindthefranchisecontract,isthefranchiseealsoentitledto

reimbursementordamages?

Not applicable; see above.

20 Inthecaseofsub-franchising,howisliabilityfordisclosureviolations

sharedbetweenfranchisorandsub-franchisor?Areindividualofficers,

directorsandemployeesofthefranchisororthesub-franchisor

exposedtoliability?Ifso,whatliability?

Not applicable; see above.

21 Inadditiontoanylawsorgovernmentagenciesthatspecifically

regulateofferingandsellingfranchises,whatarethegeneral

principlesoflawthataffecttheofferandsaleoffranchises?What

otherregulationsorgovernmentagenciesorindustrycodesofconduct

mayaffecttheofferandsaleoffranchises?

The offer and sale of a franchise is not subject to any specific law,but is subject to the overriding application of contract law and, inparticular, laws relating to misrepresentation.

22 Otherthanfranchise-specificrulesonwhatdisclosuresafranchisor

shouldmaketoapotentialfranchiseeorafranchiseeshouldmaketo

asub-franchiseeregardingpredecessors,litigation,trademarks,fees,

etc,arethereanygeneralrulesonpre-saledisclosurethatmightapply

tosuchtransactions?

As mentioned in answer to questions 14 and 15, the BFA Code mustbe adhered to. A copy of the code should be provided as part of thefranchisors disclosure. A franchisor should also provide a franchiseewith its latest certified balance sheet and profit and loss accountsand details of each director and the senior executive staff of thefranchisor. A franchisor should also disclose (inter alia) how manyfranchisees they have, how many franchisees have terminated theirfranchise agreements within the previous year and why, how many

franchise agreements were terminated by the franchisor within thatyear and why and whether it is involved in any disputes (whetherlitigation or arbitration) with current or former franchisees. Wherefranchisors use brokers to assist in marketing and recruitment, theymust ensure that the BFA Code is complied with by the broker. Inaddition, the franchisor must be careful not to make any misrepre-sentations; see question 23.

23 Whatotheractionsmayfranchiseestakeifafranchisorengagesin

fraudulentordeceptivepracticesinconnectionwiththeofferandsale

offranchises?Howdoesthisprotectiondifferfromtheprotection

providedunderthefranchisesalesdisclosurelaws?

Where a franchisee has relied on a statement (of fact or law) madeby the franchisor, whether this was made orally (at exhibitions,seminars, awareness days) or contained in sales literature (franchiseprospectus, the franchisors website, or financial projections or the


6/10



business plan for the franchisee), in entering into a contract that turnsout to be untrue, the franchisor may be liable for a claim of misrep-resentation. This remedy is not specific to franchising. An action forfraudulent misrepresentation occurs where a false statement is madeknowingly, or without belief in its truth, or recklessly as to its truth.Misrepresentation can also be innocent or negligent.

Clauses that seek to limit liability for misrepresentation are oftenincluded in franchise agreements. Nevertheless, such disclaimers are

of no effect where the franchisor has committed a fraudulent mis-representation. With fraudulent or negligent misrepresentation thefranchisee may claim rescission and damages, whereas for innocentmisrepresentation the court has the discretion to award damages.Rescission means that the contract is set aside and the parties are putback into the position in which they were before the contract wasmade; as such, damages can be substantial.

Legal restrictions on the terms of franchise contracts and the

relationship between parties involved in a franchise relationship

24 Aretherespecificlawsregulatingtheongoingrelationshipbetween

franchisorandfranchiseeafterthefranchisecontractcomesinto

effect?

Apart from general contract law principles, there are no specificlaws regulating the ongoing franchise relationship. See question25 for other laws of general application that may affect franchiserelationships.

25 Dootherlawsaffectthefranchiserelationship?

There are no specific laws. Franchise agreements are not treated anydifferently to other commercial contracts. Nevertheless, two areas ofgeneral law are particularly relevant to franchising.

The Data Protection Act 1998 (DPA) governs the processingof personal information held on living and identifiable individuals.It applies to the processing of personal data, both of which are

widely defined, and means that practically any business operating inthe UK that holds information about individuals, whether employ-ees, customers or anyone else, is affected by the DPA. A breach ofdata protection laws can lead to criminal as well as civil liability. Allthe obligations under the DPA fall upon the data controller, who isdefined as the person who (either alone or jointly or in common withother persons) determines the purposes for which and the mannerin which personal data is, or is to be, processed. In the franchisingcontext, franchisors and franchisees are both usually data control-lers, although franchisees are sometimes data processors rather thandata controllers.

Under the DPA, anyone who processes personal information(names, addresses, etc) to include a franchisee must comply with theeight data act principles, which include ensuring that the information

is fairly and lawfully processed, is kept accurate and is processed fora limited purpose. It must be kept secure and must not be kept forany longer than necessary.

In many franchises the franchisor will require the franchisee toprovide customer information to the franchisor, and franchisees willnot be able to comply with data protection legislation. This high-lights the need for the franchise agreement to set out what the fran-chisee must do to comply with data protection legislation and for thefranchisor to facilitate compliance.

It is not uncommon for franchise agreements to contain exemp-tion clauses that seek to limit or exclude the franchisors liabilityfor representations made at the pre-contract stage; for example,when supplying projected profit or turnover figures. In assessing theenforceability of exemption clauses, reference must be had to the

Unfair Contract Terms Act 1997 (UCTA), which applies where aparty seeks to limit its liability or where the contractual party seeksto avoid the consequences of misrepresentation by reliance on exclu-sion clauses. Franchise agreements are likely to be treated as standardform documents, and therefore any exclusion clauses will only be

valid insofar as they are fair and reasonable.Additionally, the Bribery Act and CRC Scheme will also have an

effect. Section 7 of the Bribery Act 2010 (which came into force in July2011) creates a new strict liability offence for companies and partner-ships of failing to prevent bribery occurring within their organisa-tion. The section 7 offence could apply in a franchising context. Theonly defence to a prosecution under section 7 is if a franchisor hasput in place adequate procedures designed to stop corruption. The

bribery prohibited by the Act applies whether it takes place in the UKor elsewhere, provided that the business being prosecuted carries onits business in the UK. Under section 7, a person associated with thefranchisor bribes another person if there is the intention of obtain-ing or retaining business for the franchisor or to obtain or retainan advantage in the conduct of business for the franchisor. The Actdefines an associated person as one who performs services for oron behalf of the person being prosecuted. What performing servicesmeans is vague and the Act indicates that it will be determined byreference to the relevant circumstances.

Generally speaking, franchisees do not perform services for or onbehalf of the franchisor, but instead perform services for or on behalfof themselves and are therefore not likely to be associated. Moreover,

franchisees generally obtain and retain business for themselves andthe franchisor benefits from it, but it is unusual for franchisees toobtain and retain business for the franchisor though this could hap-pen, for instance, with national account work. A franchisor shouldinsert a prohibition against bribery in the manual along with a pro-cedure for dealing with bribery issues.

If a franchise satisfies all four of the rules of the definition of afranchise set out within the Environmental Agency, CRC Energy Effi-ciency Scheme (CRC), it will be required to participate in the CRCfrom April 2010. The CRC is a new regulatory incentive to improveenergy efficiency in large public and private sector organisations andreduce the amount of carbon dioxide emitted in the UK. While over-all responsibility for compliance with the requirements of the CRCwill lie with the franchisor, franchisees are required to provide such

information and assistance as the franchisor may reasonably requirein order to enable it to register for, and comply with, the CRC.

26 Doothergovernmentortradeassociationpoliciesaffectthefranchise

relationship?

Most reputable franchisors and franchise professionals are membersof, or affiliated to, the BFA. The BFA Code sets out a best prac-tice guide for franchisors, consultants and franchisees. Membersare required to accept and adhere to the BFA Code, which sets outstandards in franchise advertising, recruiting and selection and dis-pute resolution.

27 Inwhatcircumstancesmayafranchisorterminateafranchise

relationship?Whatarethespecificlegalrestrictionsonafranchisors

abilitytoterminateafranchiserelationship?

Most well-drafted franchise agreements will contain an express pro-vision for terminating franchise agreements immediately in the eventof a serious breach by a franchisee (for example, abandonment, seri-ous criminal conviction, insolvency, repetitive breach or incurablebreach of a material provision of the franchise agreement). Otherprovisions can include providing the franchisee with an opportu-nity to rectify the breach within a specified period. The BFA Code(paragraph 2.4) provides that a franchisee should be given notice ofany contractual breach and, where appropriate, should be granted areasonable amount of time to remedy a default.

The franchisor (and franchisee) also have an overridingcommon-law right to terminate the agreement by accepting the fran-chisees repudiatory breach (where it is clear that the party in breachno longer wishes to be bound by the terms of the agreement), whichwill bring about an immediate end to the franchise agreement.


7/10



28 Inwhatcircumstancesmayafranchiseeterminateafranchise

relationship?

A franchise agreement is most unlikely to contain an express rightallowing a franchisee to terminate the franchise agreement. Never-theless, a franchisee may terminate the agreement under commonlaw where a franchisor has committed a repudiatory breach ofcontract.

29 Mayafranchisorrefusetorenewthefranchiseagreementwitha

franchisee?Ifyes,inwhatcircumstancesmayafranchisorrefuseto

renew?

The BFA Code provides that the contract should state the basis forany renewal of the agreement (paragraph 5.4). This wording doesnot make it obligatory that there should be renewal, but if renewalis available, its basis should be contained in the contract.

Most franchise agreements lasting five years (the usual period inthe UK) will contain two guaranteed renewals and will set out theconditions that a franchisee will have to satisfy in order to apply torenew the franchise agreement. Such conditions are likely to includethe franchisee not being in substantial breach during the term of the

franchise.

30 Mayafranchisorrestrictafranchiseesabilitytotransferitsfranchise

orrestricttransfersofownershipinterestsinafranchiseeentity?

A franchisor will wish to control who becomes a member of itsfranchise network, and this is achieved through regulating the wayin which a franchisee can sell, dispose of or transfer the franchiseebusiness. The agreement will contain provisions to ensure that a fran-chisors consent is obtained prior to the transfer and that the newincoming franchisee meets with the franchisors approval and has thenecessary skills required to ensure that the franchise is a success. Theagreement will also contain an option for the franchisor to purchaseif or when the franchisee decides to sell his or her business.

31 Aretherelawsorregulationsaffectingthenature,amountorpayment

offees?

There are no laws affecting the nature, amount or payment of fees.

32 Arethererestrictionsontheamountofinterestthatcanbecharged

onoverduepayments?

Most agreements will contain provision for the franchisor to chargeinterest on any late payments at the rate agreed by the parties. Some-times these interest rates can be high around 24 per cent per annum but very high rates could be treated as an unenforceable penalty

clause. The Late Payment of Commercial Debts (Interest) Act 1998can be relied on in order to claim interest on late payments. The rateis currently set at 8 per cent per annum above the Bank of Englandinterest rate.

33 Aretherelawsorregulationsrestrictingafranchiseesabilitytomake

paymentstoaforeignfranchisorinthefranchisorsdomesticcurrency?

A franchise agreement may contain some provision applicable to thepayment of continuing fees that deal with the time at which the pay-ment is to be converted, and at what rate. The UK does not enforceany exchange restrictions.

34 Areconfidentialitycovenantsinfranchiseagreementsenforceable?

Yes.

35 Isthereagenerallegalobligationonpartiestodealwitheachotherin

goodfaith?Ifso,howdoesitaffectfranchiserelationships?

There is no general legal obligation requiring contracting parties toact in good faith with each other. Nevertheless, the BFAs Code doesrequire the parties (both franchisor and franchisee) to exercise fair-ness in their dealings with each other.

36 Doesanylawtreatfranchiseesasconsumersforthepurposesofconsumerprotectionorotherlegislation?

It is very unlikely that franchisees will be treated as consumers forthe purposes of consumer protection laws.

37 Mustdisclosuredocumentsandfranchiseagreementsbeinthe

languageofyourcountry?

While there is no specific legislation on disclosure, the BFA Coderequires that the franchise agreement be translated (by a sworntranslator) or drafted into the official language of the country ofthe franchisee.

38 Whatrestrictionsarethereonprovisionsinfranchisecontracts?

There are no restrictions. The BFA Code provides some guidanceas to the duration of the agreement in the statement that it shouldbe long enough to allow the individual franchisee to amortise theirinitial investment specific to the franchise (section 5.4).

See also questions 39, 40 and 41.

39 Describetheaspectsofcompetitionlawinyourcountrythatare

relevanttothetypicalfranchisor.Howaretheyenforced?

Article 101 of the Treaty for the Functioning of the European Union(previously article 81(1) of the EC Treaty) (article 101) regulates

agreements, decisions or concerted practices that may affect tradebetween member states and that have the object of distorting com-petition. The UK has passed its own legislation modelled on article101, but obviously without the need for any effect on trade betweenmember states (chapter 1 of the UK Competition Act 1998). If anagreement is prohibited by article 101, the offending provisions (andin some case the whole agreement) are void and the parties can besubject to fines. Vertical agreements are agreements between under-takings that operate at different levels in the production or supplychain.

Franchise agreements are vertical agreements and have thepotential to affect competition, especially if they contain territorialrestrictions, pricing obligations or non-compete requirements. It isnot possible to remove these restrictions from formal agreements and

to hide them in commercial practices, because Article 101 appliesnot only to agreements but also to concerted practices.

Many franchise agreements may not be caught by the legislation,because they are treated as being of minor importance or have beenentered into by small and medium-sized enterprises.

Vertical agreements (including franchise agreements) have beenexempted from competition laws by the new vertical agreementsblock exemption and the accompanying revised vertical restraintsguidelines that were adopted by the EC on 20 April 2010.

The new block exemption, which is available from the Com-missions website (http://ec.europa.eu/competition/antitrust/legisla-tion/vertical.html), was published with guidelines that are availableon the same website. The guidelines are extremely important whenit comes to understanding the block exemption. The block exemp-tion applies to all new agreements entered into after 1 June 2010,

and existing agreements have to comply with it as from 1 June 2011.


8/10



Almost all properly drafted franchise agreements contain a provisionwhereby the franchisor, on receiving advice that its franchise agree-ment does not comply with EU legislation, can change the agreementso that it does comply. This clause will enable changes to be made

to existing agreements before the 1 June 2011 deadline. The blockexemption expires on 31 May 2012.

Three areas covered by the block exemption are particularly rele-vant in a franchising context. They are: price, territory (passive/active

sales), and non-compete obligations (in-term and post-term).

Prce resrcos

Resale price maintenance is a hard-core restriction (contained inarticle 4 of the block exemption). If this is contained in a franchiseagreement, none of the other provisions of the agreement will be

exempted. Not all price restrictions are prohibited: franchisors canset maximum prices and can recommend prices, provided that theseare recommendations and are not mandatory. Franchisors cannot setminimum prices either by means of express contractual provisions inthe franchise agreement or by indirect methods such as threateningfranchisees who step out of line, offering rebates or free productssuch as marketing collateral for those who comply with minimum

prices, or imposing price monitoring (see paragraph 48 of the Guide-lines for more information on this).

terrory resrcos

These restrictions are also viewed as hard-core. Exclusive territoriesare not quite as exclusive as they once were, as the Commission drawsa distinction between active and passive selling. Active sales are salesmade by franchisees who have taken active steps to obtain that cus-tomer; passive sales are sales made as a result of unsolicited enquiriesfrom customers. A franchisor can prevent active sales outside a fran-chisees territory but cannot prevent franchisees from undertakingpassive sales in respect of customers outside their territory.

iere sales

The Commission takes the view that internet sales are in principlepassive sales and, therefore, cannot be prohibited (for an analysis ofthe Commissions view on internet sales, reference should be madeto paragraph 52 of the Guidelines). The Commission does recognisethat not all internet sales will be passive sales because, for instance,if a franchisee makes use of a search engine to optimise its websitesrating in territories outside its own allocated territory, this could bean active sale. Franchisors cannot prevent franchisees from havingtheir own website, but can set quality standards for franchisees web-sites in precisely the same way that they may set quality standards for

retail premises or the vehicles that they use.

no-compee oblaos ( erm)

In-term non-compete obligations are also prohibited (contained inarticle 5) and are therefore grey list and not hardcore restrictions,which means that only the clause containing the restriction is voidand unenforceable and not the whole agreement. A non-competeobligation is, for the purposes of the block exemption, an obliga-tion on a franchisee not to be involved in a similar business or anobligation on a franchisee to purchase at least 80 per cent in value

(occasionally volumes can be used) of its required purchases from thefranchisor or its nominated supplier.

The Commission, however, recognises that a non-compete obli-gation lasting for only five years should be permitted. It is for thisreason that most franchise agreements in the United Kingdom lastfor five years. The five year exemption still applies even where the

franchise agreement is renewed after each five years. The five-yearperiod can be increased if the franchisor owns the premises fromwhich franchisees operate to the length of the lease granted by thefranchisor to the franchisee.

no-compee (pos-erm)

This is another grey list restriction. Post-termination non-competecovenant are prohibited unless they are indispensable for the protec-tion of the franchisors know-how. Changes have been made to thedefinition of know-how, the know-how must be secret (as it had tobe in the previous block exemption) but except that now followingredrafting of what is secret it appears less likely that franchisorswould be able to argue that although none of the elements of itsknow-how are secret the compilation of these non-secret elementsdo make it secret. In practice, a franchisors know-how usuallycontained in operating manuals would be unlikely to be secret.

If the know-how is capable of protection, it is permissible to

impose post-termination non-compete covenants for a period of oneyear preventing an ex-franchisee from being involved in competinggoods or services from the premises and land that it had previ-ously used. In other words a franchisor cannot prevent a franchiseefrom opening next door and the limited permission for non-competecovenants does not, on the face of it, apply to non-premises basedfranchises such as van distribution franchises. It is not clear whetherthis is intended and helpfully the Guidelines refer to point of salerather than premises and land.

The provisions referred to above relating to post terminationnon-compete covenants could have a very serious effect on fran-chising but the Court of Justice, which is the ultimate authority onEuropean matters, took a less tough stance on post-termination

non-compete covenants in its pronuptia decision and, as a result,it may be that franchisors would be able to rely on the Court ofJustices decision rather than the Block Exemption and Guidelinesto impose a non-compete covenant.

For the first time in 2010 an English court had to deal withan argument from a former franchisee (against whom enforcementof the post-term non-compete in the franchise agreement was beingsought) that the covenant did not comply with section 2 of the Com-petition Act 1998 (which is modelled on article 101 TFEU). At theinterim application, the High Court relied on thepronuptia decisionand indicated that whether the post-termination non-compete cov-enants falls outside the scope of section 2 depends on whether it isessential to prevent the risk that know-how and assistance providedby the franchisor to the franchisee will, after termination, be used by

the franchisees competitors.Please note that similar responses will be given in all EU countries

and so may need to be amalgamated.The EC or UK competition law authorities may carry our inves-

tigations into anti-competitive activities. In the UK, the OFT is theprincipal law enforcement agency (www.oft.gov.uk). The competi-tion authorities have significant investigative powers that includeentering and searching business premises and imposing fines. TheECs involvement is limited to where there has been a suspectedinfringement that affects trade between member states.

40 Describethecourtsystem.Whattypesofdisputeresolution

proceduresareavailablerelevanttofranchising?

If the parties are unable to settle a claim, they will be required tofollow the pre-action protocol (if relevant) before issuing court pro-ceedings. There is no franchise specific dispute resolution protocol.

TheUKcontinuestoresistfranchiselegislationwhetherrelating

todisclosureorregistration.TheBFAisseekingtostrengthen

itsregulatoryfunctionbyincludingfranchiseesinitsstructures

sothatitcanarguethatitrepresentsallstakeholderswithin

franchising.

Update and trends


9/10



It is possible to issue a civil claim in either the relevant county court

or the High Court, depending on the financial value of the claim. The

claimant will be required to prove his or her claim on the balance of

probabilities. At all stages in the dispute, the rules encourage parties

to consider alternative means of dispute resolution (ADR). The BFA

operates a Mediation and Arbitration Scheme to resolve franchise

disputes. The later is a formal process that results in a binding resolu-

tion of the dispute; see also question 41. Mediation is a much more

informal method, whereby an independent mediator helps the par-ties to negotiate a settlement. Mediations are often business driven

and results orientated where the parties are free to discuss, not just

those contractual issue which are dispute, but the whole commercial

arrangement. Mediation is voluntary, without prejudice and is only

binding once a settlement agreement has been entered into. It is not

uncommon for a franchise agreement to include a clause that obliges

the parties to consider forms of ADR prior to commencing court

proceedings in all cases, other than where urgent injunctive relief is

required. Choice of jurisdiction and law is a matter agreed on by the

parties in the agreement.

41 Describetheprincipaladvantagesanddisadvantagesofarbitrationfor

foreignfranchisorsconsideringdoingbusinessinyourjurisdiction.

In addition to the arbitration service offered by the BFA, the LondonCourt of International Arbitration also offers an arbitration scheme.The LCIA offers a combination of the civil and common law systems.It provides flexibility for parties and the tribunal to agree on pro-cedural matters; speed and efficiency of arbitrators appointments,means of reducing delay and counteracting delaying tactics. They

also have a range of interim remedies, for example, security forclaims and costs. Nevertheless, an arbitrator will conduct a formalenquiry process where the parties are required to produce documentsand witness statements and this could be as costly as conventionalcourt-based litigation. An arbitrators findings are final on the matterand may only be appealed to a High Court judge.

42 Inwhatrespects,ifatall,areforeignfranchisorstreateddifferently

fromdomesticfranchisors?

Foreign franchisors are not treated any differently from domesticfranchisors.

Hamlo Pra

gurmee S Jakhu [email protected]

3ATournamentCourt Tel:+441926838903

TournamentFields Fax:+441926258799

Warwick www.hamiltonpratt.com

CV346LG

UnitedKingdom


10/10

Franchise 2012 issn 1752-3338

Strategic research partners othe ABA International section

The Oicial Research Partner o

the International Bar Association

Air Transport

Anti-Corruption Regulation

Arbitration

Banking Regulation

Cartel Regulation

Climate Regulation

Construction

Copyright

Corporate Governance

Dispute Resolution

Dominance

e-Commerce

Electricity Regulation

Enorcement o ForeignJudgments

Environment

Foreign Investment &National Security

Franchise

Gas Regulation

Insurance & Reinsurance

Intellectual Property &Antitrust

Labour & Employment

Licensing

Lie SciencesMerger Control

Mergers & Acquisitions

Mining

Oil Regulation

Patents

Pharmaceutical Antitrust

Private Antitrust Litigation

Private Equity

Product LiabilityProduct Recall

Project Finance

Public Procurement

Real Estate

Restructuring & Insolvency

Right o Publicity

Securities Finance

Shipping

Tax on Inbound Investment

Telecoms and Media

Trademarks

Vertical Agreements

For more information or to

purchase books, please visit:

www.gettingthedealthrough.com

Annual volumes published on:

Documents

F2012UnitedKingdom(2)