Ed Savory, an Associate in Leathes Prior’s Franchising team, attended a forum of bfa Affiliates in London on Tuesday 16th October 2012. The bfa Affiliates are accredited professional advisers made up of lawyers, accountants, bankers, consultants and others who have demonstrated their expertise in franchising. The bfa Affiliates meet quarterly to discuss current market trends and certain “hot topics”.
The following two key legal topics were discussed at the latest Forum:
Limitations on franchisor liability
It had recently been brought to attention of the bfa Quality Standards Committee that there are a growing number of franchise agreements including clauses which seek to limit the franchisor’s liability for any claim made by a franchisee to an unreasonable degree.
For example, there have been cases of limitations capping the franchisor’s liability to an amount equal to the money paid by the franchisee to the franchisor in the preceding 12 months, or to a fixed amount linked to the initial fee, with specific exclusion made for liability for loss of profits. Conversely, the liability of the franchisee is usually unlimited.
The enforceability of such clauses is questionable as there are statutory restraints on including certain exclusions in commercial contracts under the Unfair Contract Terms Act 1977. In other words the limitation of liability must be reasonable. In assessing reasonableness, factors such as (a) the relative bargaining positions of the parties (franchisor and franchisee), and (b) whether the term in question is a fair and reasonable one to be included in the circumstances when the franchise agreement is signed, will need to be considered.
This is not a simple matter and it is important to have regard to the entire context of the franchise arrangement in question including the extent to which the franchisee’s liability is limited. For example, it is quite common to see franchisee liability limited to the management service fees which the franchisor would have received during the remainder of the term less the costs the franchisor would have incurred.
Nevertheless, the general consensus was that capping franchisor liability is not reasonable or acceptable. The franchisor must be responsible for the viability of its business system to at least give the franchisee the opportunity to run a profitable business. It was noted that the franchisor’s liability is in any event likely to be capped by the nature of the business structure through which it operates due to the legal nature of limited liability companies and wholly owned subsidiaries.
It is anticipated that a formal Technical Bulletin will be issued by the bfa in due course.
Disclosure requirements and the bfa Guide to the Code of Ethics
Under the bfa’s Code of Ethics (with which all bfa member franchisors must comply) paragraph 3.3 provides as follows:
3.3 In order to allow prospective individual franchisees to enter into a binding document with full knowledge, they shall be given a copy of the present Code of Ethics as well as full and accurate written disclosure of all information material to the franchise relationship, within a reasonable time prior to the execution of these binding documents.
In addition, the bfa has just published a revised Guide to the Code of Ethics which along with the Code is available from the bfa’s website www.thebfa.org.
There was a general view expressed that many franchisors do not strictly comply with the Code in providing prospective franchisees with sufficient information and/or a copy of the Code. This was not considered to be a major issue as the franchisors are often best placed to know the extent of information they need to disclose. For this reason the Code is not prescriptive as to exactly what information must be disclosed. The Guide does provide the minimum information which should be provided, being:
- the business and financial position of the franchisor
- the people involved in the franchise company
- the franchise proposition
- the franchisees
- the financial projections
- the contract
As well as breaching the Code, the franchisor may be at risk of a claim for misrepresentation if it fails to provide sufficient information to new franchisees. It is also worth noting that franchise agreements typically include an entire agreement clause that seeks to exclude liability for any pre contractual information provided to the franchisee.
All these factors must be borne in mind when considering disclosure and it is recommended that professional advice is sought in order to ensure that the franchise offering is compliant.
Other matters discussed
In addition to the above, the Forum also discussed:
- current market trends
- Affiliate presence on the bfa website
- feedback from The National Franchise Exhibition
- latest bfa news
