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Franchising - pitfalls for the unwary
Franchising is a business form which has developed rapidly in the UK over the last 20 years. In this country, the law gives franchising very little in the way of special "status" as compared with countries such as the USA, France and Spain which have specialist franchisee protection laws. Even Russia has a special law on franchising. These laws typically require a substantial degree of accurate disclosure by the franchiser about its business, upon which the franchisee can rely when entering into the contract.
Apart from a degree of control under EU legislation of the potentially anti-competitive provisions in a typical franchise agreement (which is reflected in the UK Competition Act of 1998), Scots law relies on the general law of contract to regulate franchise contracts. Indeed it has been said that Scotland has the oldest franchising law – the Roman maxim of caveat emptor! In other words, it is up to the "buyer" of the franchise to make his or her enquiries about the proposed purchase, and incorporate into the contract appropriate warranties and indemnities from the franchiser.
Issues which should be adequately dealt with in the agreement include:-
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An accurate definition of the territory to be covered by the franchise
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Clear provisions dealing with the degree of exclusivity to be given to the franchisee (for example, can the franchiser operate within the territory either directly by opening its own premises, or indirectly by internet sales or mail order.
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Is there to be an annual franchise fee, and is it to be reviewed at intervals?
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Will the franchisee be restricted from offering goods other than those supplied by the franchiser?
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What is the period of the agreement, and can it be renewed by the franchisee?
Very often the franchiser will present an agreement for signature which is pre-printed and "not open for negotiation". The lack of scope for negotiation may also be "dressed up" as reflecting the need to have all the franchise agreements in the same form. The lack of ability to negotiate on the terms of the contract may be justifiable to an extent – for example, if the standard form has been submitted to and given clearance by the European Commission.
Legal advice should still be taken so that the legality of the contract can be checked, and the effect of the important clauses explained. After all, the franchisee is about to invest a substantial amount of capital and make a significant commitment to building up the business within the territory. If the contract has not been prepared properly, and is in breach of competition law, the consequences can be dramatic – substantial fines (up to 10% of turnover) on both parties, and the agreement (or substantial parts) being void.
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