The Franchise Law Blog – First Edition

This is the first Franchise Law Blog. We will issue further blogs on a monthly basis. The focus of the blog is principally to draw attention to UK legal developments that affect franchising, but also to alert readers to commercial developments relating to franchising in the UK and to highlight important international developments that would be of interest to UK franchisors.  Please let me, John Pratt, have any comments, news items, or information which you believe should be included in future blogs.  I and the rest of the team at Hamilton Pratt very much hope that its contents will be not only of interest but of use to you in your franchise business.

Good Faith

There remains uncertainty as to the current status of good faith obligations in franchise agreement.  Will they be implied into franchise agreements. Our ‘Good Faith’ article which engages in a full analysis will be made available on this blog, but in summary, our view is:-

Express Duties of Good Faith

It is clear from a line of cases including Berkeley Community Villages Limited v Pullham, CPC Group Limited v Qatari Diar Real Estate Investment Co and Compass Group UK v Mid Essex Hospital Services NHS Trust that the courts will give effect to an express good faith clause.

Implied Duty of Good Faith

An implied obligation of good faith and fair dealing has been recognised by the House of Lords/Supreme Court since its decision in Malik v BCCI in 1998 but notwithstanding the efforts of Mr Justice Leggatt in the landmark, Yam Seng decision the courts have been reluctant to follow his lead.  In a franchising case – Carewatch v Focus Caring Services in 2014, the Judge refused to accept a duty of good faith.  More recently in the Court of Appeal decision in MSC Mediterranean Shipping Co v Cottonex Lord Justice Moore-Blick indicted that “there is, in my view, a real danger that if a general principle of good faith were established it would be invoked as often to undermine as to support the terms in which the parties have reached agreement”. In view of the above, the extent to which a good faith obligation will be implied into franchise agreements, is doubtful.

Contractual Discretion

The English Courts have regularly had to consider the exercise of a discretion granted by a contract to a contracting party.  In Abu Dhabi National Tanker Co v Product Star Shipping Ltd (the “Product Star”) (No 2) Lord Justice Leggatt, the father of the judge in the Yam Seng case, said:

“Where A and B contract with one another to confer a discretion on A, that does not render B subject to A’s uninhibited whim … [N]ot only must the discretion be exercised honestly and in good faith, but, having regard to the provisions of the contract by which it was conferred, it must not be exercised arbitrarily, capriciously or unreasonably.”

That decision has been followed in a number of cases using either identical or similar formulations including in the Esso v Addison decision in 2003 which related to a petrol solus agreement containing many of the features of a franchise agreement.  The position was further reinforced by the Supreme Court in the British Telecommunications v Teleonica decision where Lord Sumption indicated that “in the absence of very clear language to the contrary, a contractual discretion must be exercised in good faith and not arbitrarily or capriciously. This will normally mean that it must be exercised consistently with its contractual purpose”.

British Franchise Association’s Proposed Compulsory Arbitration Scheme

The bfa has,for over a year, in conjunction with Nigel Jones QC of Hardwicke Chambers, been working on the preparation of rules for a compulsory arbitration scheme so that all franchisor members must refer disputes to the scheme. Bfa members’ franchise agreements will be required to contain express provisions referring disputes to the bfa’s scheme.  The propsed arbitral body will be independent from the bfa and franchisors will continue to be entitled to seek injunctions and other interlocutory remedies.

It is currently envisaged that the scheme will involve three “tracks” – the principal scheme, small claims and large and complex claims. As soon as more details concerning the scheme are made available, further information will be provided in this blog.

Future blogs will keep you updated of developments.

Australian Developments – Is Australia a Model for the UK?

The Australian Government has, for some time, made clear its commitment to amend the Australian Fair Work Act 2009 to make franchisors liable for breaches of the Act committed by their franchisees.

Worldwide there appears to be increasing interest, particularly in the United States of America in making franchisors liable for the acts of their franchisees.  In the USA this has been done using the “joint employer” principle.

Another Australian development, the Small Business Unfair Contract Terms Regime came into force on 12 November 2016.  As a result any standard form small business contract entered into or renewed or varied after that date is regulated. It is likely that franchise agreements will be treated as standard form and it is also likely that many franchisees will be small businesses.

The following terms have been highlighted as giving rise to possible challenges under the new law including:-

–        unilateral variation of the operations manual;

–        non compete covenants;

–        far reaching rights to terminate in favour of the franchisor.

In many ways the approach taken in Australia reflects the provisions of a UK report prepared by the Law Commission in 2005 which made similar recommendations but which were never progressed.

Future Events

Representatives of Hamilton Pratt are making presentations at the following events:-

16-17 March – bfa International seminar

– Worldwide Trends in Regulation – Interactive Panel Discussion

29 March – School for Social Entrepreneurs

– Legal Issues and the Franchise Agreement

7-9 May –  IBA/IFA Legal Symposium, Washington DC

– The Emergence of International Franchise Associations

5-6 July – bfa Oxford Seminars

– Franchisee Seminar

– Franchisor Seminar

McDonald’s and Tax

McDonald’s recently decided to move its non US tax base from Luxembourg to the UK as a reaction to new global rules against contrived corporate arrangements. McDonald’s had been subject to an ongoing state aid investigation by the European Commission in relation to its tax arrangements in Luxembourg.  It is clear that US companies, in particular, with complicated structures which result in little tax being paid on their European operations will be subject to an increasingly hostile environment.

The UK may become an attractive jurisdiction to establish a European holding company because of its relatively low rate of corporation tax and strong network of double tax treaties.  McDonald’s have indicated that its new holding company will be responsible for “the majority of royalties received from licensing the company’s global intellectual property rights outside the US”.

The Organisation for Economic Cooperation and Development has been taking action against multi national corporate groups who seek to exploit mis-matches between different tax systems, so as to ensure that little or no tax is paid.  The European Commission has launched its own project which is producing a set of coordinated international rules designed to end this practice and to prevent companies from artificially shifting their profits to low or no tax environments where they have little or no economic activity.

2016 Franchise Cases Review (Part 1)

There were a number of franchise cases in the second half of 2016:-

Apollo Window Blinds Limited –v- Mr Morris McNeil and Mr David Taylor (Queens Bench Division)

The defendants operated an Apollo franchise under three franchise agreements. The agreements were due to expire simultaneously and by letter sent, at the last possible moment, Apollo served notice that the franchise agreements would not be renewed because of alleged breaches of contract and because the franchisee had failed to serve their renewal notices within the period specified by their franchise agreements. The defendants argued that they were not aware of the requirement to serve notice to renew, the requirement had not been enforced previously, they believed that their agreements would be renewed and that Apollo knew that they intended to continue to operate their franchise business. Following expiry/termination the franchisee continued to trade under a different brand. Apollo applied to the Court for, amongst other things, an interim injunction to enforce the 12 months’ restrictive covenants. On the face of it the Court was bound to grant an injunction but it instead ordered an expedited trial and ordered for the delivery up of documentation and information by the franchisee.

The franchisee’s defences focused on estoppel by convention, breach of an implied term of good faith and infringement of competition law.

The Court’s refusal to grant an injunction may have been influenced by Apollo’s behaviour.  The purpose of the clause which required the franchisee to serve notice to renew was to enable Apollo to start the process of recruiting a new franchisee but Apollo did not do so and so its argument that it needed the full period of the restrictive covenant was “unattractive”.

Unusually in this case, the franchisee had not planned a strategy to circumvent their post-termination non competition restrictions. Here the franchisee wanted to stay in the system but it was the franchisor that was using a contractual term which it had not previously enforced to remove a franchisee.

This case highlights that perceived “bad behaviour” may influence a judge who is being asked to exercise his discretion in your favour.

Alno (UK) Ltd v Mrs C Turner [2016] WL 05864926

This case relates to the Intoto franchise.  An Intoto franchisee decided not to renew his franchise and Intoto entered into discussions about taking over his showroom.  In fact, that did not happen because of problems with the survey of the premises and Intoto opened new premises a year or so after the expiry of the franchise agreement.

An employee of the franchisee claimed that there had been a transfer to which Regulation 3.1(a) of the Transfer of Undertakings Regulations (“TUPE”) applied.  At the Employment Tribunal hearing the judge accepted that there had, indeed, been a transfer of the franchise business from the franchisee to Intoto, because Intoto had, at the time the franchise agreement expired, indicated its intention to operate the business itself using the franchisee and his employee.

The Employment Appeal Tribunal (“EAT”) took the firm view that simply having discussions about taking over a franchise did not constitute a transfer.  It is implicit in the EAT’s judgment that simply terminating a franchise agreement does not constitute a TUPE transfer in the absence of the franchisor taking over the franchisee’s business.  This is important for franchising.  What is less clear is whether, on the expiry or termination of a franchise agreement, if a franchisor does not take over the franchise business but seeks a new franchisee for the area, that could constitute a two stage transfer from the terminated franchisee to the franchisor and from the franchisor to the new franchisee, but certainly the case is helpful in setting out the factors that would be taken into account in making an assessment of whether there was a two stage transfer to which TUPE applied. On the basis of this decision it is unlikely that a termination, a period of closure and the grant of a new franchise to an incoming franchisee would amount to a TUPE transfer.

 


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