Franchise Agreement updated

Our updated Franchise Agreement template reflects current law and commercial practice relating to franchising in England & Wales. This newsletter also outlines some key points regarding the legal and commercial background to the franchising industry.

The Franchising Agreement

The agreement can be used by a franchisor appointing another entity to act as its exclusive franchisee within an area (in the United Kingdom) delineated in the agreement. It establishes all of the terms and conditions to govern the relationship between the franchisor and franchisee. The document protects the franchisor’s position and to some extent favours the franchisor, but it is not unduly slanted towards the franchisor and it remains fair to the franchisee. The Franchising Agreement now includes additional obligations of the franchisor and franchisee, optional references to a “Disclosure Letter” containing representations by the franchisor, a clause dealing with the renewal of the franchise period, a new schedule of mandatory policies of the franchisor and comprehensive provisions on competing with the franchised network.

How important to the UK economy are franchised businesses?

The NatWest British Franchising Association 2016 Annual Survey found that the contribution of franchising to the UK economy was reckoned to be £15.1 billion. This figure increased by 46% since 2006 and by 10% since 2013. The total number of people employed in franchising in the UK is in the hundreds of thousands, the vast majority of franchised businesses are profitable, and most UK franchise brands are UK-owned and developed.

How does a franchised business work?

The principle adopted by franchisors is simple. Instead of developing their own outlets, they expand by granting a franchise to others to sell their products and/or services. The franchisor appoints and grants a franchise to each franchisee by entering into an appropriate form of franchise agreement with that franchisee. The form of agreement is drafted in a way which ensures that the franchisor can exert substantial influence and control over how the franchisee operates its business, over how it markets and sells the products and/or services, and over the quality and standards to be maintained by the franchised business.

The franchisee is a company whose directors and staff are untrained in the business in question but, under the franchise agreement, the franchisor provides the franchisee with a package containing all elements necessary for the franchisee to establish itself in the business and to run it with the benefit of ongoing training and other support from the franchisor. By operating as a franchised business, the franchisee company benefits from being able to follow a proven business model, to trade on its own account, and to use its own premises (adapted to meet the franchisor’s standard requirements). The franchisee trades under the franchisor's branding (i.e. using the franchisor’s trade name, logo, get up, trade mark etc.) so that to the outside world the franchisee is the franchisor.

What is the legal framework?

Franchising as a concept is distinct from other means of conducting a business. The relationship between the franchisor and franchisee is different from that between principal and agent, client and contractor, employee and employer, supplier and distributor, and joint-venturers or partners. That distinct difference between franchising and other commercial arrangements is recognised in law.

As between the franchisor and franchisee the legal position is primarily regulated by the contents of the franchise agreement, and it is the general law of contract which principally governs the relationship between the parties. There is no “law of franchising” and there is virtually no law or regulation in the United Kingdom specific to franchising. Nor are there any general legal rules in the law of contract that will readily “fill in the gaps” by implying into a franchise agreement all of those terms needed but overlooked by the parties. They therefore will need to ensure that the content of their franchise agreement covers as fully as possible the legal and commercial terms of their relationship and the practicalities of operating the franchised business.

The grant of a franchise entails licensing by the franchisor of its trade marks, names, know how, copyright material, confidential information and other intellectual property rights to the franchisee. This means that intellectual property law is also a key area of law regulating the position between them, but it cannot operate in a vacuum, however, and so the franchise agreement needs to set out what intellectual property rights are granted and how they may be used by the franchisee.

There is UK legislation which specifically relates to the practice of pyramid selling, but this will not apply to franchising provided that under the franchisor’s arrangements with all of its franchisees, franchisees are not encouraged to appoint, or will not find it more remunerative to use, sub-franchisees who in turn might use sub-sub-franchisees to sell the goods or services that are the subject of the franchise.

The laws in the UK regulating anti-competitive agreements and activities apply to regulate franchising, but the law permits certain restrictive provisions and practices in relation to franchised operations if they do not go beyond certain bounds. You should take professional legal advice about what restrictions you can include, in particular if they will go further than those included in our template franchise agreement.

UK law does not (unlike some other jurisdictions) require a franchise agreement to be registered with any authority, nor does it impose any duty on a party either to provide pre-contractual disclosure of any matters to the other party or to deal in good faith with the other party, although the parties are free to include such requirements in their franchise agreement if they so agree.

There is no legal requirement for franchisors to be members of the British Franchising Association (the “BFA”), a trade association which promotes ethical franchising in the UK but if a franchisor is a member of the BFA, it is required to adhere to the BFA’s Code of Ethics. The Code requires a franchisor member to issue full and accurate written disclosure of all information material to the franchise relationship before signing the franchise agreement.