Common Franchising Misconceptions Dispelled

Franchise lawyer Shelley Nadler dispels some common franchising misconceptions

Franchisees often ask if it’s worth spending the money to get a solicitor to review a franchise agreement when a franchisor has told the franchisee it’s a standard form agreement and they won’t accept any amendments to it.

If you don’t read and take legal advice on the franchise agreement, you will not fully understanding what signing up to the franchise involves. If there’s anything you don’t understand in the agreement, you should ask your solicitor to explain it to you or ask for clarification from your franchisor.

Getting the balance right

A franchisor needs to have a number of controls in the franchise agreement to ensure the uniformity of its system, the quality of its products or service and the protection of its brand, so the contract will be one-sided, but it should also be fair to you and the franchisor. A British Franchise Association affiliate solicitor should be able to advise you if the franchisor has got this balance right.

The franchise agreement should specify the services you will receive from the franchisor. A bfa affiliate solicitor will be able to explain the extent to which the franchisor is obliged to provide these services. They will also be able to explain your rights under the agreement, your obligations, any performance targets you are expected to attain, the franchisor’s right to terminate the agreement, the financial provisions and many other legal obligations you may not fully appreciate.

A bfa affiliate solicitor will be experienced in reviewing franchise agreements and will be able to tell you if there is anything unusual in the franchise agreement that may require further explanation from the franchisor.

Once you understand the extent of your rights and legal obligations under the agreement, you will be able to make an informed decision on whether or not to enter into the franchise.

Level of protection

A common misconception among franchisees is that they will obtain the same protection as consumers under their franchise agreement. This is not usually the case. Consumer protection is provided by a number of acts that imply certain terms into contracts to help protect the general public.

It’s assumed a consumer is likely to have less business acumen than a business person, therefore certain terms are implied into contracts for the supply of goods and services to balance out the relationship.

A consumer is a person not acting in the course of a business. It’s unlikely that a franchisee would be considered a consumer, as the relationship with the franchisor is formed in the course of a business. Therefore, the protection afforded to a franchisee is less than that available to a consumer.

The Sale of Goods Act ensures goods are of satisfactory quality and fit for the purpose of sale. Therefore, when a franchisor sells goods to its franchisees, the Sale of Goods Act will imply terms regarding the quality of those goods.

The Supply of Goods and Services Act 1982 implies a term into contracts for services that the supplier will carry out the service with reasonable care and skill. This will apply to the franchisor, which supplies services under the franchise agreement to its franchisees.

However, as the franchisee is not a consumer, the franchisor can exclude, limit and vary the implied terms referred to above, as long as such provision satisfies a test of reasonableness, which is set out in the Unfair Contract Terms Act.

UCTA also applies to contractual terms in standard form contracts - which would include franchise agreements - excluding or restricting liability for breach of contract, which have to be reasonable. Any term in a franchise agreement that tries to restrict or exclude the franchisor’s liability for breach or non-performance will have no effect, unless it’s fair and reasonable.

Franchisees should make sure they fully understand what they are signing and should not assume the courts will step into protect them, simply because they have made a bad bargain.

If things go wrong

Some franchisees fail to realise that if they decide franchising or the particular franchise system they have chosen is not for them, they cannot voluntarily terminate the franchise agreement.

Usually, a franchise agreement will not give a franchisee the right to terminate the agreement voluntarily before the end of the term. If the franchisee does decide to leave the franchise before the end of the term, the franchisor can claim for any loss of income it may suffer as a result of the franchisee terminating.

The franchisor’s loss of profits would include any income it obtained from the management services fee, the sale of products or otherwise. If, for example, the franchisee terminated at the end of year two of a five-year franchisee agreement, the franchisor could claim for loss of profits during the remaining three-year period of the term.

However, the franchisor will be expected to mitigate its loss. This would mean it would be expected to take reasonable steps to find a replacement franchisee to take over the franchisee’s territory.

This doesn’t mean the franchisor has to do everything possible to find a replacement franchisee, simply that it has to make reasonable efforts to do so. So realistically, a franchisor could claim for the loss of income it suffers from the date of termination by the franchisee until such time as it takes the franchisor to find a replacement franchisee.

This could make a voluntary termination an expensive option for a franchisee. Therefore, the sensible thing for a franchisee to do if they wish to leave a franchise is to seek to sell the business and also ask the franchisor for assistance in finding a purchaser.

About the author

Shelley Nadler is a legal director in Bird & Bird’s international franchising team.