United Kingdom Proposes New Law Affecting Franchise Agreements

If adopted, the recently published Unfair Contract Terms Bill ("UCTB") will significantly change the way franchise agreements are viewed by English courts and could create headaches for franchisors with franchises in the United Kingdom ("UK"). The UCTB was published by the Law Commission in draft form earlier this year. The bill will not become effective unless it is formally adopted, but the draft reflects the views of the current government so it is likely that the bill will be adopted sometime in 2006.

The UCTB would supercede the Unfair Contract Terms Act 1977 ("UCTA"), which currently regulates certain exclusion clauses in franchise agreements and other business to business contracts. Under the UCTA, a franchisee that signed a standard form of franchise agreement can challenge the fairness of a clause in that agreement that excludes or limits the franchisor's liability for breaching the agreement. If a court finds that the clause is not fair and reasonable then such clause will not be enforced.

The UCTB would expand this "fair and reasonable" test for franchisees with nine or fewer employees, referred to as "micro-businesses". The Law Commission believes that micro-businesses need the same type of protection afforded to consumers. Therefore, under the UCTB a micro-business would be allowed to challenge any standard agreement term that was not negotiated and is not the definition of the main subject of the agreement or the price paid under the agreement. If the franchisee can show that the clause is not fair and reasonable then such clause will be ruled unenforceable.

This law could have a large impact on franchising in the UK since many franchisees maintain nine or fewer employees, and most franchisors refuse to negotiate certain terms in their standard franchise agreements. Any non-negotiated agreement terms that are weighted in the franchisor's favor would be vulnerable to attack under the UCTB. For example, a clause allowing the franchisor to terminate the agreement for certain defaults while omitting any such rights for the franchisee could be held unfair and therefore unenforceable. If the UCTB becomes law, franchisors would be wise to take steps to avoid violating the new restrictions (e.g. by revising their standard agreements to include a prominent acknowledgement by the franchisee that each term was negotiated and agreed to be fair and reasonable by both parties).

Ryan Whitfill is an attorney in the Franchise and Distribution section of Haynes and Boone, Dallas. This article is based on information from Field Fisher Waterhouse, London.

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