Are your standard terms and conditions going to land you in trouble?

By Rob Turner

03-2018

Franchisors are expected to deliver a full business-format to its franchisees – including standard consumer terms and conditions/contracts. It is, therefore, essential that franchisors ensure that these terms and conditions/ contracts comply with, what over the last five years, has become an increasingly complex area of law.

Failure to do so can have substantial negative impact upon the franchisor’s business. This increasing complexity is due to the way that the law has come to recognise that consumers cannot be expected to have the same level of business acumen and legal knowledge that businesses do.

Consequently, the law treats business- to-consumer (B2C) contracts such as website terms and conditions (T&Cs), e-commerce sale T&Cs etc., differently to business-to-business (B2B) contracts by granting additional protections to consumers.

Franchise businesses which operate consumer-facing businesses cannot afford to ignore consumer legislation. Failure to comply with consumer legislation can result in franchise businesses not being able to rely on key terms in their B2C contracts, exposure to civil and criminal liability, and negative publicity through investigations by consumer bodies.

This article provides a brief overview of some of the key obligations of which franchise businesses should be aware if they provide goods, services or digital content to consumers.

Are they fair and transparent?

The highly publicised Consumer Rights Act 2015 (CRA) came into force in October 2015. The CRA consolidated and updated English consumer law and replaced the consumer law provisions of many pieces of legislation.

The CRA is a complex piece of legislation, but there are certain key provisions of which all operators of consumer businesses should take note.

First, the CRA applies a fairness test to all terms in B2C contracts (save for the price and main subject matter of the contract). Section 62(4) of the CRA states that a term is unfair if: ‘contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer.’

This means that any clause of a contract that provides a franchise business with an advantage over a consumer that creates a significant imbalance between the parties may be unfair. Crucially, this test is applied at the time the contract is formed.

In other words, even if a franchise business only seeks to enforce the term when it is fair to do so, if the term itself is widely drafted and could be used by the business to gain an unfair advantage over a consumer then it will be unfair.

An unfair term is not binding on the consumer. This means that the franchise business cannot rely on that term of the contract. In addition, consumer bodies may investigate unfair practices, which can lead to negative publicity.

Secondly, the CRA applies a transparency test to all terms in B2C contracts. This means that each term in a B2C contract must be ‘expressed in plain and intelligible language’ and, if in writing, legible. The practical implication of the transparency test is that legal jargon commonly used in B2B contracts should be avoided in B2C contracts.

As examples:

  • Avoid using ‘indemnity’ or ‘indemnify’ in favour of ‘responsible for’ or ‘liable for’.
  • Avoid ‘subject to’ in favour of clearer phrases such as (depending on the context) ‘conditional upon’.
  • Avoid ‘indirect loss’ in favour of a fuller liability clause explaining exactly which types of losses can and cannot be recovered.

Failing the transparency test does not make the term unenforceable (assuming the term is not also considered unfair) but any ambiguity in the interpretation of the term will be given the meaning that is most favourable to the consumer.

The combination of the fairness test and the transparency test means that consumer-facing businesses need to take a different approach to its terms and conditions, both in substance and in form.

Do they satisfy the quality standards and refunds policy requirements?

The CRA has also set certain minimal standards that all businesses providing goods, services or digital content to consumers must satisfy.

In brief, these standards are:

  • For a franchise business that supplies goods to consumers, that business must supply goods that are of satisfactory quality, fit for purpose, as described and that match any model seen or examined.
  • For a franchise business that supplies services to consumers, that business must provide the services with reasonable care and skill.
  • For a franchise business that supplies digital content to consumers, that business must supply digital content that is of satisfactory quality, fit for purpose and as described.

There are two key practical consequences for franchise businesses that operate consumer-facing businesses.

First, these terms cannot be excluded or limited by a business, whether expressly or by implication.

This means that any terms of a B2C contract that, in effect, limit these implied warranties will be unenforceable against a consumer. For example, a term in a B2C contract that states that goods are provided “as is” will not be enforceable – to state that goods are provided “as is” would cut across the implied warranties for the supply of goods, e.g. that the goods are of satisfactory quality.

Secondly, the CRA sets out specific remedies that are available to consumers if the quality standards are not met by the business. These “statutory remedies” are complex, but in short, a consumer’s remedies are:

For goods:

  • The consumer may reject the goods within 30 days of delivery and, in that case, is entitled to a full refund (including delivery charges and any costs of returning the goods).
  • The consumer may exercise the two-tier remedy of requiring the goods to be repaired or replaced, failing which it can then either reject the goods or require a refund.

If the rejection is exercised in the first six-months from delivery, the business may not make any deduction for the use the consumer has made of the goods, but otherwise a deduction may be made.

The two-tier remedy has no time limit, other than the reasonably expected natural life of the goods and the statutory limitation period (six years for contracts under hand).

For services:

  • The consumer can require repeat performance at the business’ cost, failing which the consumer can require a price reduction.

For digital content:

  • As digital content is difficult to return once downloaded, a consumer’s remedy is to require the business to repair or replace non-conforming digital content.

If undertaking repair or replacement would be impossible or disproportionate for the business, or if the business fails to repair or replace within a reasonable time, the consumer can require a price reduction.

As well as a consumer being able to rely on these remedies, franchise businesses should be mindful of the consequences these remedies have for its refunds policies.

First, the statutory remedies cannot be limited or excluded by businesses, so a business’ refunds policy must be at least as generous as the statutory remedies, otherwise the refunds policy will not be enforceable. Some consumer-facing businesses now do not offer a refunds policy and instead refer consumers to their statutory rights.

Secondly, a business must be careful not to hold out a consumer’s statutory rights as a special refunds policy offered by the business.

The Consumer Protection from Unfair Trading Regulations 2008 imposes civil and criminal liability if a business misleads consumers. These regulations include a list of black list offences, one of which is presenting rights given to consumers in law as a distinctive feature of the business’ offer.

So, for example, a business advertising its special refunds policy that is better than its competitors when, in fact, it only reflects the position already afforded to consumers at law, will be misleading under these regulations.

Do they give a right to cancel?

A right that is familiar to most people is a consumer’s right to cancel a contract. The Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013 provide a right for consumers that purchase goods, services or digital content by distance communications (usually online or by telephone) from businesses to change their mind and cancel the contract within the cooling-off period.

The cooling-off period for goods is 14 days from delivery and for services/ digital content is 14 days from the date the contract is formed.

If a consumer changes their mind and exercises their right to cancel the purchase of goods, then the consumer must return the goods and the business must provide a refund to the consumer (both of the purchase price and the cost of delivery to the consumer up to the standard delivery cost).

There are certain exceptions from the right to cancel. For example, purchasers of bespoke goods do not benefit from the right to cancel. In addition, a business may not have to refund in full in certain circumstances, e.g. because the goods have been used, the services have been partially performed etc.

A franchise business should be aware of when a consumer will have the right to cancel, its terms and conditions must reflect this right and it must have processes in place for when consumers exercise this right.

So do your consumer terms and conditions comply with the law?

Judging by what we see in our day-to-day business the answer is probably not. Does it matter? Yes, it certainly does.

If you do not comply, not only will your franchisees be unable to enforce the rights against consumers, but also your brand may be substantially damaged in the public eye and your franchisees may well have a claim against you for any loss they suffer as a result.

This article was originally published in Franchise World Magazine

 

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