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Time for action on ethics

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The British Franchise Association has again been concerning itself with the question of self-regulation v Regulation. Regulation with a capital “R” in this context means regulation by the State—laws governing the way in which the relationship between franchisor and franchisee has to work; laws that might, for example prohibit “no reliance” (on anything said by the franchisor to the franchisee prior to the contract) clauses; or proscribe formal, pre-contract, disclosure by franchisor to franchisee (on which the franchisee can rely); or cooling off periods.

Regulation could be by direct legislation or by creating a regulator (FRANCOM?) which could then, under powers given to it by Parliament, create and enforce a code of practice for those who wish to engage in “franchising”.

That, of course begs a very big question—what is a franchise? Lots of things are called “franchises”; there is the Harry Potter franchise—a collection of marketing and other rights, built around the JK Rowling books and the films of those books; there is the “Who Wants to be a Millionaire” franchise (concerned with the TV show format “rights”) and, of course, it has been stated on more than one occasion that al-Qaeda operates through a franchise.

There is a saying that if it looks like a duck, quacks like a duck, and eats slugs and snails, it probably is a duck. Most of us could recognise a business format franchise if we saw one; but try and define it legally? Not so easy, and the UK Parliamentary drafts people at the Dept of Trade (I still refuse to call it the trendy BIS) have not always covered themselves in glory. Consider the Trading Schemes Act. Designed to strengthen their hand in prohibiting pyramid trading schemes, it catches mainstream business format franchising and would have been an unmitigated disaster for the industry without frantic, and partially successful, lobbying by the BFA. Despite that, it has probably cost franchisors collectively £millions in lawyers’ fees and should still be causing them substantial angst.

I have yet to meet anyone in the UK franchise industry in favour of Regulation but there is a serious problem in our franchising—the imbalance of power between franchisor and franchisee. If that cannot be addressed, Regulation will come. The UK is the only significant jurisdiction in the world without Regulation to redress that balance. Regulation will come anyway, sooner or later. The question is, will it be the industry, that is, hopefully, the BFA,  that is given statutory powers to regulate itself or will ill-thought out, over complex, incomprehensible regulation be imposed from “on high”, by people who do not understand us and what we do?

The UK Government had, and missed, its chance to redress the balance: a decade ago the Joint Law Commissions of England and Scotland published a draft “Unfair Contracts Bill”. Its purpose was to bring together all the various bits of legislation concerning unfair contract terms, exclusion of liability clauses, consumer protection, misrepresentation etc into one Act of Parliament.

At the time, and in the press, I praised that Bill and in particular the fact that it would give small businesses contracting with larger businesses, a degree of protection from unfair contract terms and unfair conduct similar to that enjoyed by consumers. Virtually every new franchisee would qualify and, at a stroke, unethical franchisors would have to sharpen up their behaviour or find themselves losing court actions brought by dissatisfied franchisees—something then, and now, almost unknown in the UK.

The franchisor community, alerted by me to that proposed legislation, went into collective panic and my good friend John Pratt was engaged by the BFA to travel the country, calming nerves. Strange really, that the BFA membership, who had all signed up to a Code of Ethics requiring them to act fairly towards their franchisees, should be so worried by the prospect of a bit of legislation which would give those same franchisees the power to hold them to account if they did not act fairly.

Anyway, the draft Bill was never adopted as proposed legislation and a very good opportunity to bring UK law closer to some of the better laws of our continental neighbours was missed. Had it been adopted, most ethical franchisors would have been unaffected. Bad franchisors, on the other hand, would have gone to the wall. Bad thing?

So what’s the problem? Why is there such an imbalance of power when BFA members (over half the population of UK franchisors that we would be prepared to have as members) are required to behave fairly towards their franchisees? Does that not mean that the courts would prevent them enforcing unfair terms of their contracts or enforcing fair terms unfairly? In the Civil Law jurisdictions of the European mainland the answer would be yes, but that’s not how it works in Common Law jurisdictions—England and Wales, most of the US, Canada, Australia, New Zealand and most of the other old Commonwealth members. In Common Law jurisdictions the courts interpret contracts according to their plain wording unless statute says otherwise, and franchising is not regulated by UK law.

And now we get to the, frankly, unbelievable bit. Whilst the BFA’s Code of Ethics (for present purposes the European Code of Ethics for Franchising (the “European Code”) combined with the BFA’s explanation and expansion of that code (the “Explanation”) and its Guide to the Code of Ethics (the “Guide”)) requires its members to act fairly towards their franchisees and Para 5.1 of the  European Code states that “The agreement shall comply with [the law] and the Code of Ethics” it is still generally acknowledged that “standard” UK franchise agreements, as used by BFA members and others, are singularly one-sided and unfair towards franchisees—just compare the five or six specific obligations of the franchisor contained within such agreements and the twenty or thirty specific obligations of the franchisee.

Furthermore there is no suggestion in the Guide that, as required by the European Code,  the franchise agreements used by BFA members (as opposed to the other behaviour of those members) should either comply with the Code or incorporate the provisions of the Code so that they form part of the contractual arrangement between the franchisor and franchisee.

In fact the Extension, in its first paragraph, is at pains to ensure that this is not the case by saying “[the Code] does not form any part of the contractual agreement between franchisor and franchisee unless expressly stated to do so by the franchisor” and the Guide states in para 3 of its Introduction that “this Guide and the Code of Ethics itself is not intended to form the (sic) part of any contract between franchisor and franchisee unless the parties……have specifically agreed this”.

Very few franchisors state in their franchise agreements that they will comply with the Code.

As a consequence, the vast majority of franchisees have no legal right to complain if their franchisor does not comply with the Code, nor can they use such (mis)behaviour by the franchisor as a defence in any claim brought against them by the franchisor. All they can do is raise their concerns with the BFA, if their franchisor is a BFA member, so that the BFA can, if it agrees, “rap the knuckles” of the franchisor, or in extreme cases, ease it out of the Association; so to a place where there is no restraint whatsoever on its legal behaviour.

Now to give it its due the BFA has over the last few years and specifically during the periods in office as compliance/ethics officers of Andrew Quail and now Kelly Blackmore-Lee, done a great deal in explaining and outlawing specific unfair provisions sometimes found in franchise agreements but that is really only tinkering and we still have no specific statement from the BFA that franchise agreements should be fair.

Certainly I see no sign that franchisors are failing to gain admission to membership or failing re-accreditation because their agreements are not fairly balanced between the interests of franchisees and franchisors.

Another rather odd thing is that although the BFA provides schemes of arbitration and mediation to deal with franchisee/franchisor disputes neither of them are mandatory (so franchisors do not have to use them) and the service provided is legal rather than ethical, so the arbitrator cannot find against the franchisor on the grounds merely that it acted unfairly or the provision of the contract on which it wishes to rely is unfair.

As observed above, this is unbelievable and it is not understood by most franchisees who sign up with BFA member franchisors precisely because they believe that as BFA members they will comply with the Code of Ethics. If subsequently they find themselves in dispute with their franchisor, they are generally horrified to discover that their franchisor cannot be held to account for alleged breaches of the Code of Ethics whether by the franchisee, the courts, or the BFA. In fact the BFA’s only sanction is to require the franchisor to leave the Association, which is of no assistance whatsoever to the franchisee and might actually put him in a worse place.

Now loss of membership is a useful sanction, and it always pleases me to hear that a franchisor has been “eased out” of the Association as it suggests that the BFA takes its role as the “Guardian of Ethical Franchising in the UK” seriously. It is not, however, I am quite sure, sufficient to satisfy the Dept of Trade.

So, what’s to be done to prevent the UK Government deciding that the BFA’s regulation of franchisors is merely cosmetic, and that Regulation is necessary to prevent even BFA members, despite their Code of Ethics, taking advantage of their franchisees by enforcing unfair agreements unfairly and unreasonably, secure in the knowledge that ethics won’t come into the argument, even if played out under the BFA’s mediation or arbitration scheme?

To my mind the solution is very simple—the BFA should, after a brief period of consultation, require its members, with immediate effect, to incorporate into all their franchise agreements, existing and future, an obligation to comply with the Code of Ethics. Then, after a longer period of consultation (but no more than a year) set out in detail, with a specimen agreement, its views on what a fair franchise agreement should look like. Once that guidance has been promulgated to its members, and made public, BFA members should be required, thenceforth, only to enter into fair agreements with their franchisees.

That would not, of course, mean that they would all have to adopt the same form of agreement, as what was fair, or unfair, for one franchise network might not be fair, or unfair, for another. Also, what might be unfair for a new franchisee entering the network, might not be unfair for a renewal, or grant of a new agreement, following resale of a well established franchised business unit.

The BFA should also require all its members to submit to mandatory arbitration under a BFA scheme, under which the arbitrator would be specifically tasked to consider the parties’ compliance with the Code of Ethics (which affects franchisees too) and give judgements based on such compliance or non-compliance as well as the strict wording of the franchise agreement.

There will of course be fall out and some franchisors would, no doubt, as a result, leave the BFA, but probably not the good and ethical ones. Also:

  • The job of franchise contract lawyers will become much harder and for a while they will have much more work to do.
  • There will be more franchisee on franchisor litigation as franchisees will then have a fighting chance of winning if their franchisor has acted unfairly.
  • There will be many more franchise litigation lawyers, just as there are in the regulated jurisdictions.
  • Franchisor membership of the BFA by their intended franchisor will be even more of “must have” for prospective franchisees.
  • Probably more of the franchisors that the BFA would like to have as members, will join.
  • The Dept of Trade (alright, BIS), will start to regard the BFA as an effective regulator of its franchisor members.

The consultation has, I believe, started. At the recent round of Regional Meetings (BFA member franchisors, and Affiliates—lawyers, accountants, consultants and bankers), and Affiliate Forum the question was posed as part of the discussion over the Association’s “2020 Vision”: What should the BFA do to improve its position as a regulator and enhance the view taken of it by Government? At the Affiliates’ Forum in London on 23rd September and the South West Regional Meeting in Southampton on 25th September I set out my argument, above, quite forcefully. It is an argument that I have been making for at least fifteen years. Five years ago, possibly even two years ago, I would have been shouted down. Now there seems to be a general acceptance of the logic of this suggestion. Perhaps its time has come.

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.