A new year is an opportunity to review our strategies, to set or re-align goals and agendas.  In doing so it is essential to keep an eye on legislative updates and changes.  In our first blog of 2023, Franchise Specialist Natalia Shvarts summarises the most important developments and decisions in franchising of 2022 and to highlights what may be on the horizon in 2023.

We don’t typically see too many court decisions which are specifically franchisee/franchisor related. There are several reasons for this:

• The franchise industry is pretty good at avoiding disputes in the first place.
• The franchise industry is rather good at resolving disputes through mediation.
• Litigation can be slow and expensive!

So, when a franchise case does go to court, this sends waves through the entire sector. Most franchise litigation cases fall roughly into two buckets – it’s either about the post termination non-compete restrictions or it’s a misrepresentation claim.

Post Termination Restrictive Covenants

Perhaps the biggest case of 2022 was, of course, Dwyer (UK Franchising) Limited v Fredbar Limited and Shaun Bartlett which put the enforceability of restrictive covenants to test yet again.

Clauses which impose restrictions on a franchisee’s (and/or individual where the franchisee is a corporate entity) ability to trade will only be enforceable to the extent that (1) the franchisor has a legitimate interest to protect and (2) the restrictions are proportionate and reasonable.

In the judgment, the court emphasised that whether or not a contractual provision is enforceable will depend on the circumstances of each individual case in that, for example, a 12 month’ restriction may not always be reasonable for each and every situation. But herein lies the challenge for franchisors – franchise agreements are meant to be the franchisor’s standard document offering the same terms to all franchisees.

There are, of course, a number of steps that franchisors can and should be taking to protect their position and ultimately their network. One option is to revisit your franchise agreement and to amend the wording of the relevant clauses perhaps to introduce a sliding scale and some variables to cover the different stages. Another option is to have different provisions in the franchise agreement version issued on renewal from the version used initially. It goes without saying that good drafting is essential, but it is not the whole story. Ultimately, franchisors will need to assess each case on its own merits as and when it arises in order to determine to what extent the restrictions may be enforceable and, provided the wording of your franchise agreement allows you to do so, adjust the scope of such restrictions.

For more information, please see our previous blog: https://www.beyondcorporate.co.uk/game-over-for-restrictive-covenants/ or contact our Franchise Team: franchise@beyondcorporate.co.uk

Avoiding Misrepresentation

The second most common claim that franchisees tend to bring against franchisors is a claim of misrepresentation – essentially that the franchised business is not what the franchisor advertised it to be. The danger of a misrepresentation claim to franchisors is that if the franchisee is successful then the franchise agreement may be rescinded, meaning the franchise agreement will not simply be terminated but it will be treated as if it never existed and therefore none of the post termination or any other restrictions will be enforceable against the franchisee and/or the individual.

A misrepresentation is an untrue statement of fact. Therefore, the best way that franchisors can help themselves is to ensure that all statements which are made in their marketing materials when advertising their business and opportunity are true. This extends not only to the financial projections but simply every statement which the franchisor puts out about their franchise.

It is for this reason that franchisors should regularly review and update their marketing materials and ensure that their marketing teams have the latest, most up to date information and understand that each statement should be carefully checked to ensure that it can be backed up with evidence and facts.

In addition, exposure and risk can be reduced if the franchise agreement contains correctly drafted appropriate clauses and if franchisors insist that their prospective franchisees obtain legal advice prior to signing a franchise agreement.

For more information, please contact our Franchise Team: franchise@beyondcorporate.co.uk

Good Faith – To include or not to include?

It is a well-established fact that there is no general doctrine of good faith in English contract law. This is the reason that English law is a preferred choice for many because it gives certainty to the parties – that only what you have expressly agreed in the contract applies. Historically the courts refused to change or add contractual terms, thus refusing to correct a bad bargain situation. But as always there is an exception to every rule and in certain circumstances a duty of good faith may be implied.

So, what does this all mean in practice for the franchising community and where are we today with the concept of good faith?

The challenge with good faith is that it is not something that has been legislated for and therefore it is open to interpretation and the challenge with interpretation is that it can mean different things to different people (and judges are also people who have their own individual opinions). Franchisors can avoid this uncertainty and therefore reduce the risk of good faith being implied into their relationship with franchisees by addressing the issue head-on, namely include a clause in your franchise agreement expressly setting out:

• what good faith means;
• whether it applies generally or to specific clauses/provisions only; and
• if you have clauses which allow one party discretion, address how such discretion is to be exercised;
• specifically exclude any implied terms.

The fact is that by nature franchise agreements are likely to be viewed as “relational contracts” where the duty of good faith is more likely to be implied if it is not already expressly addressed within the agreement itself.

For more information, please contact our Franchise Team: franchise@beyondcorporate.co.uk

New Vertical Agreements Block Exemption Order

Certain practices and behaviours between separate business undertakings can be or seen to be anti-competitive and hence bad for the market. In the UK, competition regime is governed by Competition Act 1998, the Enterprise Act 2002 and the Enterprise and Regulatory Reform Act 2013.

The nature of franchising is such that it carves up the territory of the UK into smaller areas and franchise agreements typically contain provisions which, according to the legislation, would be considered anti-competitive and therefore prohibited. However, the legislature recognised the positive impact that certain co-operation and trading models bring to the market and consumers and this resulted in another piece of legislation which set out the exemptions to the general rule. Previously, the competition regime was governed at EU level but in view of Brexit, the UK needed its own legislation and hence the new UK Block Exemption Order came into force on 1^st June 2022.

This is significant for the UK franchise market not only because the previous exemption was expiring and a new one was needed but also because the UK is now able to depart from the EU rules.

The majority of the previous regime has been retained with a few welcome new additions:

• we now have a clear definition of “passive” and “active” sales, which again, brings certainty to the market;
• The order recognises that some franchise systems are vehicle and not premises based and this is now expressly addressed protecting the position of van-based franchise systems;
• The definition of “know how” has been simplified and clarified.

Although for the majority of franchisors there will probably be no need in re-writing their franchise agreements, it would make sense to check that the wording in your standard franchise agreement still works in light of the new Block Exemption Order.

For more information, please contact our Franchise Team: franchise@beyondcorporate.co.uk

Employment Law

All franchisors and certainly the vast majority of franchisees are employers and therefore employment law developments will always be relevant to the franchising sector. Below is a summary of the most important developments and up coming changes.

Exclusivity Ban for employees on Lower Earnings

Exclusivity provisions in employment contracts for employees on zero hour contracts were banned in 2015. With effect from 5^th December 2022, this ban is now extended to employees whose net average wage is equivalent or below the Lower Earnings Limit which is currently £123 per week.

Statutory Increases

In April 2023 the following rates will increase:

• National minimum wage and national living wage
• The weekly rate of statutory maternity, paternity, adoption and shared parental pay
• The weekly rate of statutory sick pay
• The maximum compensatory award for unfair dismissal, the maximum amount of a week’s pay for calculating the unfair dismissal basic award and statutory redundancy pay.

Employment Status

The government has published new guidance which helps businesses and individuals to navigate the complex landscape of determining whether someone is self-employed, a worker or an employee. The guidance can be accessed here: https://www.gov.uk/government/publications/employment-status-and-employment-rights

Holidays for casual workers

The decision of the Supreme Court handed down on 20^th July 2022 confirmed that all workers and employees are entitled to 5.6 weeks’ holiday per year and that the holiday entitlement should not be pro-rated for those who do not work full time hours or throughout the year.

Therefore, as currently stands, every worker is entitled to 5.6 weeks’ holiday and holiday pay is calculated as the average pay over 52 weeks in which the individual worked.  Weeks where no work is done but the contract continues should be excluded.

Right to Work Checks

The temporary adjusted right to work check measures which allowed prospective employees to send scanned documents rather than originals came to an end on 30^th September 2022. Inspecting scanned copies is therefore no longer permitted and documents must be checked in person or via an approved third party Identity Service Provider.

Menopause and Disability

A reminder that the definition of disability for the purposes of the legislation (Equality Act 2010) is a physical or mental impairment, which has a substantial and long-term adverse effect on the individual’s ability to carry out normal day-to-day activities. “Substantial” means “more than minor or trivial”.

In the case of Ms M Rooney v Leicester City Council EA-000070-DA the Employment Appeal Tribunal ruled that the employment tribunal was wrong to dismiss Ms Rooney’s case on the basis that Ms Rooney’s menopausal symptoms did not amount to a disability and that the sex discrimination claim had no reasonable prospect of success. The appeal was allowed and the case was sent back to the employment tribunal to determine the question of disability.

Our Employment Team at Beyond Corporate provide employment law advice and support both ad hoc and on a retained basis. For more information, please contact our team: franchise@beyondcorporate.co.uk

Data Protection & Privacy – What’s New?

Data protection and privacy is another area that affects all businesses. Most, if not all businesses, process personal data and must therefore comply with the data protection and privacy regimes – and the two are separate! Without further ado, below are the key developments within the privacy sector and a summary of the Information Commissioner’s Office’s (ICO) areas of focus for 2023.

• Data Transfers – earlier this year the European Commission published their updated Standard Contractual Clauses (SCCs) and, for UK transfers, the ICO published the International Data Transfer Agreement and the Addendum to the SCCs. These new model clauses must now be used in all contracts where personal data is transferred to third countries.
• EU – US Adequacy – we are a step closer to an adequacy decision for the EU-US Data Privacy Framework which will simplify the process for transferring personal data across the Atlantic. The draft decision was issued by the European Commission on 13^th December 2022 which once adopted will become final.
• PECR – the Privacy and Electronic Communications (EC Directive) Regulations 2003 (often referred to as PECR) are different to the Data Protection Act 2018 and GDPR. As the name suggests PECR governs the use of electronic marketing and communications. Notwithstanding the focus on privacy and data protection in the recent years, many businesses are still failing to comply with PECR. The ICO is now stepping up their enforcement of the PECR rules and the current trend that we are seeing is at least one large prosecution/fine per month.
• Children’s Code – another area of focus for the ICO is children’s privacy. The ICO have already indicated that they will be specifically focussing on compliance with the ICO’s Children Code so any franchisor within the children sector may want to review their practices to ensure that correct processes are in place on processing of children’s data.
• Other areas of priority – in their annual action plan the following have been identified as specific areas of focus for the ICO:
  • Compliance with Subject Access Requests – do you have a clear process for this and do your franchisees know what to do if they receive a SAR?
  • Impact of technology on vulnerable groups – this in particular is about AI, biometric technologies, online tracking and CCTV. Whether you are in the technology sector or a sector dealing with vulnerable individuals, you may wish to ensure that you and your network understand what the requirements are on your business.
  • Specific industry focus for next year is the financial sector. This does not meant that all other sectors are off the hook but the ICO has indicated that they will particularly focus on how the financial industry uses and collects intelligent databases.

For more information, please contact our Commercial Team: franchise@beyondcorporate.co.uk

Competition and Markets Authority – Areas of Focus for 2023

Similarly to the ICO, the other regulator to watch is the Competition and Markets Authority (CMA) who also, helpfully, publish their annual plan. Perhaps unsurprisingly the CMA’s focus in 2023 is also across those areas which are more likely to affect consumers during the cost of living crisis.

CMA’s priority areas for 2023 set out in the CMA’s draft plan are:

• Areas of essential spending including accommodation and caring for others;
• Addressing pressure selling and false or misleading practices especially online;
• Dealing with anti-competitive behaviour, e.g. price fixing – are you comfortable that your network understands what amounts to price fixing and that price fixing is illegal?
• Continuing to undertake further work on green claims and energy efficiency.

The consultation on the above is still open until 5pm on 30^th January 2023. You can read the full draft or respond to the consultation here: https://www.gov.uk/government/consultations/competition-and-markets-authority-annual-plan-2023-to-2024-consultation

For more information on any of the above topics, please contact our Franchise Team: franchise@beyondcorporate.co.uk