Could the proposed new consumer laws effect the sale of franchises?

06 August 2014

As a result of a recent review of consumer protection laws in the UK, the Consumer Rights Bill was introduced to the House of Commons in January. It is not as yet confirmed how long it will take for it to become law.

This coincides with the introduction of the Consumer Rights Directive, which the UK and other EU member states are required to implement and apply to consumer contracts concluded on or after June 13. Most of these requirements have been implemented in the UK by the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013.

These two new consumer laws seek to protect consumers but could, due to unintended poor drafting, potentially impact on the sale of franchises in the UK. If this is the case, it could be potentially disastrous for franchising.

Those involved in the sector, therefore, need to devote immediate attention to obtaining clarification from government that this will not be the case.

Failing such clarification, it will be up to the courts, which tend to favour franchisees, to decide. Given recent profranchisee decisions, one must consider it likely that the courts will come down on the side of franchisees given an opportunity to do so. This would de facto create a franchise sales law.

The basic problem is that potential franchisees could be deemed to be “consumers”. The Consumer Rights Bill defines a “trader” as “a person acting for purposes relating to that person’s trade, business, craft or profession, whether acting personally or through another person acting in the trader’s name or on the trader’s behalf ”. A franchisor is, therefore, clearly a trader and therefore the provisions of the Bill applies to any sales that it makes.

The Bill’s definition of a“consumer” means “an individual acting for purposes that are wholly or mainly outside that individual’s trade, business, craft or profession”. Crucially it does not define a consumer as “an individual acting for purposes that are wholly or mainly outside that individual’s potential or intended trade, business, craft or profession”. Thus, it is arguable that an individual buying a franchise could be deemed to be a consumer, as is the case in Germany.

Some might suggest that comfort can be gained from the Benincasa v Dental Kit case. This European Court of Justice case involved an Italian franchisor and German franchisee. The franchisee was claiming to be a consumer under German law, so that he could take advantage of the very protective German regime. Fortunately for the franchisor, the ECJ ruled that as the franchise agreement was expressly stated to be subject to Italian law whether or not the franchisee was a consumer was a matter of Italian, not German law. The Italian consumer law was very clear, and did not include a potential franchisee. As a result the franchisee could not take advantage of German consumer law. This case is however of little comfort to English franchisors as it merely underlines the importance of a consumer law clearly defining consumers so as to exclude potential franchisees. The Bill not only introduces consistent definitions of key concepts (such as who classifies as a trader or consumer), but also introduces new statutory rights and remedies for consumers, and updates and modernises the law in certain areas (in particular in relation to digital content).

The regulations will apply to all consumers, including, of particular relevance to franchisors, those who make a purchase in a location other than the trader’s place of work (“off-premises contracts”). If potential franchisees are deemed by the courts to come within the definition of consumers, then these statutory rights and remedies could be made available to all individuals (not companies), who purchase a franchise. This would mean that the sale of franchises to individuals would be subject to pre-contractual disclosure obligations and “cooling-off ” rights, amongst other things.

The key issues of concern for franchisors would be as follows. l

Pre-contract information
The regulations would place obligations on all franchisors to provide potential individual franchisees with the precontractual information specified in the regulations, prior to entering into the franchise agreement or any other contract (for example, the total costs of the relevant products/services, and the arrangements for payment and delivery). For any sales which are made off-premises, franchisors would have to give the potential individual franchisees the pre-contract information, in a durable medium within a reasonable period (and no later than the commencement of the franchise).

Cancellation rights
The individual potential franchisee would have the right to withdraw from the franchise agreement without giving any reasons during a 14 calendar day “cooling-off period”. Where a cancellation right exists, the franchisor would have to give the individual potential franchisee formal notice of its cancellation right as prescribed in the model form contained in the regulations.

If the individual potential franchisee exercises his cancellation right, the franchisor would have to reimburse all payments received from him, within 14 days of being informed by him of his decision to cancel.

Returning goods
When an individual potential franchisee exercises a cancellation right, he would be required to return any goods purchased within 14 days of notifying the franchisor of the cancellation, although the latter should still specify if the individual potential franchisee should bear the cost of returns. If the franchisor fails to supply the pre-contractual information required by the regulations, the individual potential franchisee would be able to recover the costs incurred by it as a result of the franchisor’s breach, up to the value of the franchise fee he paid.

The Bill proposes to consolidate the provisions on consumer protection that are currently set out in the Unfair Contract terms Act 1977 (UCTA) and the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCRs). Parts of UCTA will remain in force, but the UTCCRs will be revoked in their entirety. If potential franchisees are considered to be consumers, franchisors would only be able to limit their liability in respect of franchise fees and time for performance of their obligations under the franchise agreement if it does not prevent the individual potential franchisee from being able to recover the full franchise fee (and any other limitations would be subject to a test of fairness).

Liability for breach of the implied term that the services will be provided by the franchisor with reasonable skill and care would not be able to be excluded or limited. The timetable for implementation of the Consumer Rights Bill has not been finalised, but it is clearly a matter of great urgency that the BFA and others, with an interest in franchising, obtain confirmation from the government that individual potential franchisees do not come within the definition of a consumer. There may be debate about whether or not the UK needs a franchise law, but there can surely be no disagreement that such law should be the result of careful consideration and consultation, and not the result of careless drafting and oversight.