The Franchise Law Blog – Eighth Edition

First, I apologise for the delay in publishing this latest blog – a combination of a very busy time and not many interesting developments. We now have enough to list in the blog, some of which I hope will be of interest to you.

EU Domain Names

On 28 March 2018 the European Commission issued a notice to the effect that subject to any transitional arrangement that may be contained in a possible withdrawal agreement, EU top level domain names will no longer apply to the United Kingdom with effect from the UK’s withdrawal date.  This means that if you are established in the United Kingdom, but not in the European Union, you will no longer be able to register EU domain names (typically ending with .eu)  or, if you have existing EU registrations to renew them. The position concerning the revocation of existing EU domain names is not currently clear.

EU’s Privacy Regulation

This is due to be adopted at the end of 2018 or early 2019.  The Regulation addresses critical issues of data privacy and like GDPR, the law will even apply to companies outside Europe.

The new Regulation will, like the existing 2002 e-privacy directive, regulate the treatment of traffic and location data, restrict direct marketing by email and other channels and limit the use of online tracking devices such as cookies. However, the new Regulation will have expanded scope and stricter application. An essential part of its approach is a prohibition on the processing of “electronic communication data” by providers of electronic communications services, subject only to very narrow exception.

Electronic communication data includes the content of messages that are sent using communication services and also the metadata generated by a message.

Domino’s Challenges

Until recently Domino’s has been held up in the United Kingdom as the archetypal successful fast food franchisor, but a number of factors have dented that reputation. In early August Domino’s announced that its first half profits had fallen by nearly 10% largely attributable to costs relating to overseas expansion. The market was also concerned that Domino’s was expecting to open only sixty stores in Britain in 2018. Nevertheless, UK Domino’s  franchisees remained extremely profitable.

Further bad news for Domino’s is that a number of franchisees have created an action group to review the way that Domino’s deals with its franchisees. Apparently franchisees are particularly concerned with the way that the chief executive, David Wild, operates the business. This is a sign of increasing activism by franchisees in the UK who want a greater involvement in the franchise business and who understand that pooling their resources gives them additional strength.

CRC Energy Efficiency Scheme Closure

Nearly all UK franchise agreements contain a reference to the CRC Energy Scheme, a mandatory emissions trading scheme which came into operation on 1 April 2010. The reason is that whilst the scheme only applies to large businesses, franchisors have to include their franchisees when calculating the extent to which they are regulated by the scheme and, as a result, a number of franchisors with large franchise networks were caught.

The good news is that the CRC Energy Efficiency Scheme (Revocation and Savings) Order 2018 which was made on 11 July 2018 comes into force on 1 October 2018 and provides for the closure of the scheme which is not being replaced.  Franchisors will no longer need to refer to the CRC in their franchise agreements.

Vision Express Case

In Colin Ali and Others v Abbeyfield VE Limited, the High Court, gave its judgment on 27 March 2018. A group of franchisees brought a claim in relation to their joint venture agreement – the Vision Express franchise model involves a joint venture approach in which the franchisor and the franchisee have shared ownership of the joint venture company. Clause 15 of the joint venture agreement contains pretty standard provisions relating to misrepresentation and provided that the franchisee must submit particulars of any representations made by the franchisor and, if he does not, then he is “deemed” not to have relied on them.

Apparently none of the franchisees bringing the claim took legal advice or were told that they should. The court analysed the difference between fraudulent and negligent misrepresentation and is a useful reminder of the legal position in this difficult area.

The franchisees alleged that representations were made even though a number of the alleged representations related to representations as to the franchisor’s opinion. Franchisees argued that Vision Express either didn’t hold the opinions or that there was an implied representation that Vision Express had a reasonable basis for holding those opinions when, in fact, there was no such reasonable basis.

Vision Express argued that it was not intended that the franchisees “slavishly” adopted or copied the financial projections that were provided to them, but the court rejected that even though some of the documents contained disclaimers and decided that the projections constituted fraudulent misrepresentation and, therefore, liability could not be excluded. The court also concluded, that if only negligent misrepresentations had been made, then clause 15 was ineffective to exclude liability for negligent misrepresentations because it failed the test of reasonableness. The court focused in particular on the strength of the bargaining positions of the parties, whether franchisees knew or ought reasonably to have known of the extent of the provisions of clause 15 and if a term excluding liability does so on the basis that a condition is not complied with, whether it was reasonable at the time the joint venture agreement was entered into, to expect that compliance with that condition would be practical. The franchise agreement failed on all three aspects.

Exclusion of Liability

Many franchise agreements contain clauses to the effect that franchisees have not relied on any statements or representations made by the franchisor in order to protect franchisors from misrepresentation claims. However, in the recent decision in First Tower Trustees Limited and other v CDS (Superstores International) Limited, the Court of Appeal unanimously held that non reliance statements amounted to an exclusion of liability for misrepresentation and were therefore subject to section 3 of the Misrepresentation Act 1967 and the test of reasonableness under the Unfair Contract Terms Act. This case related to leases and not franchise agreements and confirms at the Court of Appeal level the approach in the Vision Express case.


Trade Secrets Enforcement etc Regulations

These Regulations came into force on 9 June 2018. They implement the provision of EU Directive 2016/943 and are complex but it is good news for franchisors who do, of course, provide a great deal of confidential information to prospective franchisees because it provided additional protection. Notwithstanding the enactment of the Regulations, franchisors should continue to ensure that their franchise agreements contain confidentiality obligations on franchisees.

Is the Implied Duty of Good Faith Dead?

Increasingly, franchise lawyers in the UK are proceeding on the basis that franchisees will have a very substantial uphill struggle in persuading the court that an obligation of good faith should be implied into a franchise agreement. That probably remains the position notwithstanding that earlier this year the Court of Appeal implied a duty of good faith into an oral joint venture contract in the case of Sheikh Tahnoon v Ioannis Kent. In 2008 the parties became equal shareholders in a luxury group hotel business, but did not enter into a written agreement. The venture was not successful and the parties fell out. Proceedings were commenced and Mr Kent alleged that Sheikh Tahnoon was in breach of the implied duty of good faith. The Court found that the contract did not create a fiduciary relationship but implied two “good faith” provisions that a joint venturer could not sell his interest in the joint venture company without informing the other and secondly neither of the joint venturers could use their position as a shareholder to obtain a financial benefit at the expense of the other.

Mr Kent who argued for the implication of the implied terms was fortunate that Lord Justice Leggatt gave the lead judgment because he had been pretty much a lone voice in favour of implying good faith obligations. Here the court was clearly influenced by the close relationship of trust between the parties and the fact they had decided not to record the terms of their agreement in writing. It is in our view, much less likely, that a court would imply a duty of good faith in a lengthy and detailed franchise agreement. It is also our view that it is only a matter of time before English law follows the lead of almost all other jurisdictions and show a willingness to imply duties of good faith into commercial contracts.




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