Will franchise agreements be interpreted unfavourably to franchisors?
In the very recent decision of Persimmon Homes Ltd v Ove Arup [2017] EWCA Civ 373, the Court of Appeal confirmed that the contra proferentem rule now had a very limited role in relation to commercial contracts negotiated between parties of equal bargaining power. That rule should only be applied in cases of genuine ambiguity.
The contra proferentem rule has the effect that any ambiguity in a non negotiated clause is resolved against the party that put the term forward because a party who imposes terms on another must make those terms clear and should suffer the consequences if it fails to do so. That remains the position even though the UK’s most senior judge, Lord Neuberger, had previously suggested that the contra proferentem rule is of little relevance to commercial contracts, which should be interpreted according to their words, context and commercial common sense.
Since franchise agreements are almost never negotiated, it seems that the contra proferentem rule was still applying to them, which does add additional reasons for ensuring that franchise agreements are drafted with as much care as possible.
What do “endeavours” clauses mean?
Franchise agreements inevitably impose obligations on franchisees to try to achieve an objective, whether it is promoting their franchise business, or ensuring that complaints are dealt with properly. There are three commonly used obligations, which are set out below:
Best endeavours. The courts have historically recognised “best endeavours” as the most onerous obligation. All the steps which are in a franchisee’s power to achieve the relevant objective and which a prudent, determined and reasonable business persons would take when acting in his own interests. A franchisee may be required to sustain substantial losses, but probably not to act in a way that would ruin its business.
Reasonable endeavours. This only requires a party to take one reasonable course to achieve the objective of the endeavours clause, not all the available reasonable courses. A franchisee can consider his own interests and commercial considerations in determining whether any particular action should be taken.
All reasonable endeavours. The meaning of this expression is the least certain, but it may mean something close to a best endeavours obligation.
New bfa Technical Bulletin
The bfa has issued a new technical bulletin concerning “kick backs”. It should be read in conjunction with the 2009 technical bulletin headed “Purchase Incentives to Franchisors”.
The new technical bulletin emphasises that kick backs are not unethical but it refers to the Guide to the Code of Ethics which states that no franchisor should have secret sources of income. The bfa goes on to say that it “does not like the general principle of kick backs” but the technical bulletin simply addresses the question of transparency and disclosure so that franchisees must be made aware of the receipt of these payments or incentives.
Are Franchise Agreements “Standard Terms”
This is a difficult question with important consequences because when a party deals on its “written standard terms of business” any term limiting or excluding its liability for breach of contract or claiming to render no contractual performance or one that differs substantially from that reasonably expected is subject to a test of reasonableness for it to be enforceable – section 3 of the Unfair Contract Terms Act 1977. Unfortunately the Act does not define what is meant by dealing on written standard terms of business.
A key element in establishing whether standard terms are being used is how consistently they have been used. On this point there are two important cases:
In Hadley Design Associates v City of Westminster [2003] EWHC 1717 (TCC), HHJ Seymour QC suggested that the terms would have to be:
“drawn from as a matter of routine and intended to be adopted or imposed without consideration or negotiation specific to the individual case in which they were to be used”.
In Yuanda (UK) v WW Gear Construction [2010] EWHC 720 (TCC), Edwards-Stuart J said that the terms should be terms used by a company:
“for all, or nearly all, of its contracts of a particular type without alteration (apart from blanks showing the price, name of the other party and so on).”
Even if a franchisee is given an opportunity to negotiate the franchise agreement – which would be unusual – if such opportunity did not actually result in changes to the franchise agreement, then the franchisor and the franchisee will have dealt on standard terms.
Recently the Court of Appeal considered the use of standard terms in the case of African Export-Import Bank v Shebah Exploration and Production Co Ltd [2017] EWCA in which the Court of Appeal held that if there had been detailed negotiations as there was in this case, resulting in at least three changes of considerable commercial significance – then it cannot be said that the parties are dealing on standard terms. This raises the interesting question of whether it is in franchisors’ commercial interests to negotiate a small number of clauses in their franchise agreement.
How do the Courts interpret Franchise Agreements?
The Supreme Court handed down an important judgment in Wood v Capita Insurance Services Ltd earlier this year to try to clarify the approach of the English courts to contractual interpretation. The issue is a hot topic for lawyers because of apparent conflicts between the Supreme Court’s decision in two leading cases in which, in the first case, the Supreme Court seemed to favour giving words their “business common sense” meaning and emphasising the commercial context in choosing between alternative interpretations. In the second, the Supreme Court focussed on the words themselves and their natural meaning.
In the latest case the Supreme Court made it clear that it had not changed its position and that accordingly there was no need to reformulate the guidance given in the two cases Arnold v Britton and Rainy Sky SA v Kookmin Bank. When considering the meaning of a clause the court must consider the contract as a whole. The court should also look at the factual background and implications of rival constructions as well as examining the relevant language of the contract itself. This “guidance” unfortunately raises more questions that it provides answers but highlights the challenge in trying to work out what unclear contractual language actually means.
Can you prevent franchisees from selling goods on Amazon?
On 26 July 2017 the Advocate General of the European Court gave his opinion on a case involving a selective distribution network and not a franchise network, but both are regulated by Regulation 330/2010 – the European Commission’s regulation applying the competition rules to vertical agreements such as franchise agreements.
Coty supplies luxury cosmetics through a selective distribution network. In 2012 it changed its agreement so that its selective distributors had to conduct internet sales through an electronic shop window of the distributor and the luxury character of the goods had to be preserved. One of its distributors objected.
The Advocate General concluded that the clause, referred to above, was not caught by Article 101 of the Treaty on the Functioning of the European Union – there is an equivalent provision in the UK’s Competition Act. The Advocate General also considered that a clause preventing distributors using third party platforms for internet sales was not necessarily caught by Article 101. Whether it is, is dependent on the nature of the product, whether the restriction is applied in a uniform fashion and without distinction and does not go beyond what is necessary. Clearly, in this case, luxury products were the subject of the distribution network and different considerations will apply to non luxury products. When the European Court hands down its decision – and it usually follows the advice of the Advocate General – franchise lawyers will have to consider the case carefully to establish the extent to which franchisees can be prevented from selling their products on Amazon and other similar websites.
The Franchise Law Blog 