Franchise specialist Fiona Boswell selects half-a-dozen legal moments that shaped franchising during the past 12 months.
As the year draws to a close, I thought it might be a good idea to look back on a number of ground-breaking legal issues which has affected UK franchising during the past 12 months.
Although members of the media have chosen to focus on employment misdemeanours, with regards to franchising, I firmly believe there were many more important issues which may have passed under the radar.
For me, 2023 was good for franchisors when you analyse the verdicts passed in UK court rooms. It has been a year when the good practices and policies of franchisors have received praise from judges, with courts happy to uphold well-drafted contracts.
So here are my ‘Six Big Takeaways’ for 2023:
General Duties of Good Faith will not be implied into a contract unless there’s a contractual gap that is required to be filled. This was highlighted by the case of Hunters v Brybond.
This means that the provisions of well-drafted contracts, which address the issues that ‘good faith’ is often used to challenge, will not be overridden to imply terms that are already expressly covered.
Consistently applied policies and practices that are documented can commercially justify reasons that might otherwise seem unfair. Case law looked at The Braganza Duty. This is where a franchisor is required to exercise its discretion fairly – and not irrationally, capriciously or unreasonably.
It determined that to evidence any breach of contract, by failure to comply with the Braganza Duty, was a high bar. In the case of Hunters v Brybond, the court made it clear that the decision not to award a franchisee an exclusive territory was justified commercially, and was made to mitigate the risk of conflict between franchisees.
The court agreed that this decision had been considered and conducted openly with the franchisee. The court also concluded that the franchisor had consistently applied well-documented policies which related to exclusivity in the allocation of development opportunities.
Express Renewal requirements must be adhered to: In Winkworth v Goble, the court sided with a franchisor that refused to renew a franchise agreement because the franchisee had failed to provide business accounts.
The franchisee argued that the supply of accounts was immaterial to the case, and that the franchisor had not provided a specified timeframe for when these accounts had to be submitted or what period they should cover.
But the court decided the franchisee did not have the power to rewrite the agreement which the judge explained was sufficiently clear. The court also said that if any breach had taken place, there needed to be a concerted effort to remedy this (in advance of renewal) as soon as possible.
Franchise agreements should clearly specify whether a territory is exclusive or not. In London Business House (and others) v Pitman Training, the former argued that the agreement had not been drafted clearly with regards to exclusivity.
The court explained that it is vital for any franchise agreement to clarify the extent of any exclusivity being granted, and that there was no room for interpretation. The High Court thus rejected the claim made by London Business House.
The court decided London Business House had failed to prove that it had suffered any loss as a consequence of Pitman’s breach of alleged exclusivity. And that any loss had not been caused by Pitman.
Boilerplate clauses are your contractual armour. Key cases this year have focused on the interpretation of the franchise agreement. And, in doing so, key clauses which are often found towards the back of an agreement have forcibly come into play.
This was evident in the London Business House (and others) v Pitman Training. The Acknowledgements and/or Non–Reliance clause is vitally important, as is the Waiver clause. These Boilerplate clauses are a vital part of a well-drafted franchise agreement. They are written to help franchisors overcome challenges from disgruntled franchisees.
It is clear the franchisor must balance the need to adjust and respond to system changes, as well as to the needs of franchisees, while also preserving its contractual rights.
Beware. While courts may not yet be prepared to pierce the veil of vicarious liability, public opinion will hold you to account for the misdeeds of franchisees.
The past year has highlighted the importance of ensuring that your network is adhering to good employment practices, in order to avoid public and potentially Government censure, along with unwanted reputational damage. Perception is reality and illustrates the need to have third party checks, measures and sanctions firmly in place.
Overview
In 2022, the franchisee appeared to benefit most, due to the enforceability of non-compete post termination restrictive covenants. However, in 2023, franchisors have bounced back thanks to the implementation of clear policies, consistent practices and well-drafted contracts, which have denied disgruntled franchisees too many court successes.
It has restored some faith in the court system, with judges understanding the commercial interests of the franchisor. These franchisors are the custodians of the UK’s franchise system, which should operate to benefit the network as a whole.
The court of public opinion should never be ignored at any price, and there is always a need for unambiguous, watertight contracts, which uphold high standards and practices across the network. Achieve this, and franchisors are part of the way towards avoiding public censure.
