Legalities of Franchising in the UK

For any successful international business, expansion into the United Kingdom offers exciting new business opportunities and growth potential. The UK is also often chosen as a base from which to establish a launch pad for further expansion across the European Union.

Brexit may of course erode some of these benefits, but many of the attractions of the UK market will endure whether or not the UK remains inside or outside of the EU.

The UK and its relationship with the EU

A common misunderstanding is that the UK is a single legal system. There are certain fields of legislative competence devolved to the local parliaments, but there are substantive fields of law which apply across the UK.

Another common misunderstanding is that the EU is a fully harmonised legal system. The EU is a union of 28 (possibly soon to be 27) different member states that share common political, economic and social objectives. However, significant differences remain between individual Member States that prove challenging to businesses entering the EU market.

Therefore, whilst a legally compliant English law franchise agreement will, by its very nature, incorporate a number of EU legal principles, if it is to be used in other Member States, it should still be reviewed for its compliance with the mandatory local laws of the relevant Member State.

Regulation of franchising in the UK

The disparity between the legal systems of Member States applies to franchising. Some Member States have franchise-specific legislation requiring, for example, franchisors to register with the authorities and/or to issue a pre-contractual disclosure document to prospective franchisees. Some Member States treat franchisees as akin to commercial agents or consumers and a franchisee.

Some Members States, such as Germany, have a codified duty of good faith, which applies to all elements of the franchise relationship. This can impact on a franchisor’s contractual discretion and its ability to take unilateral decisions on behalf of the network.

By comparison, the UK is a very straightforward jurisdiction. There are no registration or disclosure obligations, the legal distinction between franchisees, consumers and agents is clear and there is no general duty of good faith under English law which applies to franchising.

As such, English law remains an attractive choice of law for international franchisors wishing to do business in the UK and the wider EU.

The British Franchise Association is a trade association which promotes ethical franchising in the UK. The Bfa’s “Code of Ethics”, which is not legally binding but which its members must abide by, provides a benchmark for good industry practice in relation to issues such as pre-contractual disclosure, advertising, recruitment, online selling, the exercise of fairness throughout the franchise relationship and dispute resolution.

International franchisors which join the Bfa will need to adapt their franchise agreements to ensure they comply with the Code of Ethics.

Structuring the franchise business

Businesses launching into the UK may intend to operate corporately-owned outlets as well as franchised outlets and/or provide on the ground support to its franchise network, in which case a launch may or may not be best achieved through the creation of a new vehicle or the acquisition of an already established local business. Foreign ownership and investment in the UK is subject to very few regulations.

There are no general restrictions on foreign ownership of UK assets or companies. All new companies must register with Companies House, the registrar for companies in the UK, and will be subject to official requirements, such as the filing of annual accounts.

UK employment contracts are subject to a number of statutory protections for employees, many of which are derived from EU law. Critical employee considerations include impact of local tax regimes on employee stock options, Works’ Council establishment, talent availability, and transferring employment rights for employees acquired in a business sale context

Choice of law

An important consideration for an international franchisor is which law should govern its franchise agreement for the UK, and in which venue it will choose to resolve disputes.

The UK is a signatory to the New York convention on the enforceability of foreign arbitration awards and the UK has a number of bi-lateral treaties with other countries which recognise judgements passed by foreign courts.

Understandably, international franchisors prefer to elect the law of their home country in their franchise agreements. This approach is likely to work in the UK, but it is important to check and in any event take advice on the impact of mandatory English law on the franchise agreement.

For international franchisors which are using the UK as a launch pad for further expansion into the EU and further afield, and/or which use multi-tier structures such as master franchising, electing English law to govern the franchise agreement (or at least the sub-franchise agreement, in the case of master franchising) is a sensible decision.

For international franchisors which are based in common law jurisdictions, English law will feel very familiar. In addition, a franchise will be much more attractive to a prospective UK and/or European franchisee if it is subject to English law and the venue for resolving disputes is in the UK (as opposed to a non-European choice of law and venue for disputes).

Protecting the brand

Each Member State has its own IP regime, as well as being subject to EU law and international treaties. Trade marks and design rights for the UK can be registered through the UK Intellectual Property Office or alternatively (until Brexit take effect) an application for a Community Trade Mark to provide protection in all Member States.

If the franchisor already has marks registered in other jurisdictions which are party to the Madrid Protocol, it may be possible to add the UK to the international registration by application to the World Intellectual Property Organization.

Competition/antitrust law

Competition law affects franchise agreements both in the UK (where the regulator is the Competition and Markets Authority) and between Member States (in which case it is the European Commission). Unlike the “rule of reason” approach in the US, competition law does disadvantage franchise systems against corporately owned businesses.

This is a complex area of law, and penalties for breaches can be severe (including unenforceability of agreements and/or fines expressed as a percentage of global turnover), which is why specialist franchise lawyers should be consulted.

Some of the key issues include retail price maintenance, restrictions on “passive sales” outside of a contractual territory, bans on online selling and exclusive supply and other non-compete obligations.

Other laws affecting franchising in the UK

Trading Schemes  Regulations on ‘pyramid selling’ schemes do not expressly exempt franchise agreements, so it is important to ensure that the franchise comes within one of the general exemption criteria.

Anti-bribery The UK has one of the strictest anti-corruption regimes in the world (even in comparison to the US Foreign and Corrupt Practices Act).
Employment Provided that the franchisor-franchisee relationship is structured correctly, the risk of franchisees being deemed to be employees of the franchisor, or the risk of joint employer liability for franchisors, which is on the rise in the US, Canada and Australia, is very low.

Data Protection The EU has the strictest data protection regime in the world. The EU General Data Protection Regulation came into force in May 2018 and applies to every business – whether located in the EU or not – that offers goods and services to EU citizens or that monitors EU citizens’ behaviour.

Brexit

At the time of writing, the outcome of Brexit is still unclear. Assuming that there is some form of Brexit, for international franchisors which are operating across the EU and UK, Brexit is likely to impact the following key areas:

IP Protection  Do you need to obtain separate UK and CTM protections? Most likely, yes.

Choice of law  Will English law agreements be enforceable in the EU? Most likely, yes, but arbitration may be a safer bet in the short term.

Competition/antitrust law and data protection  Will there be divergence between the UK and EU? In the short term, this is unlikely.

Supply terms Extra flexibility should be built into supply terms to take account of the “known unknowns” of tariffs, additional regulations and currency flows.

It is extremely important that franchisors looking to do business in the UK invest properly in taking legal advice from a lawyer specialising in franchising to ensure that their business operations and franchisee agreements are legally compliant.

Understanding the risks and issues and managing those risks through effective structuring and enforceable legal contracts will enable international franchisors to reap the rewards of doing business in one of Europe’s largest and most dynamic markets.