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22 September 2015
English law franchise agreements commonly contain exemption clauses seeking to limit or exclude the franchisor's liability to a franchisee. The enforceability of these exemption clauses is determined by reference to the Unfair Contract Terms Act 1977, which provides that such clauses in "standard-form" documents are enforceable only if they are fair and reasonable. The same principle applies to any standard terms of supply which a franchisor or an affiliate may use to regulate and govern the supply of products and equipment to franchisees which are necessary for the operation of the franchise.
The British Franchise Association (BFA) – the self-regulatory body which promotes ethical franchising in the United Kingdom – views unilateral limitations and exclusions of liability in franchise agreements as being appropriate only in limited circumstances. The BFA has considered making it a requirement of membership that no such blanket limitation/exclusion of liability should be included in a member franchisor's franchise agreement, but decided that the effect of the Unfair Contract Terms Act should be sufficient to regulate these terms between a franchisor and its franchisee (Technical Bulletin 13.01).
In a recent ruling on a commercial contractual dispute(1) the High Court called into question the reliability of exclusion clauses in standard-form business-to-business contracts by applying the Unfair Contract Terms Act. While a franchised business was not the subject of the case, the ruling serves as a timely reminder to franchisors that reliance on these types of exclusion and limitation cannot be taken for granted and that their enforceability will ultimately be judged against the Unfair Contract Terms Act reasonableness test.
The ruling followed a claim to recover the price of goods sold and delivered – admitted by the defendant – who then served a counterclaim for defective products. The judge considered whether the claimant's standard terms operated to limit the claimant's liability.
The Unfair Contract Terms Act restricts how business parties to a contract can exclude or limit liability for breach of contract, negligence or other breaches of duty in the agreement. When an exclusion or limitation clause is disputed, the courts will apply the act using the 'reasonableness' test – the court will take into account the "circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made". The burden is on the party seeking to enforce the term to show that it was fair and reasonable. The courts will also consider a number of other factors, including the bargaining position of the parties, whether a party received an inducement to accept the term and whether such terms are commonplace in a particular industry.
The claimant argued that sections of its standard terms served to protect it from counterclaims, while additionally offering the replacement of goods or compensation limited to the invoice value of defective goods. Despite this, the court was unwilling to enforce the standard terms which were supposed to have the effect of blocking the defendant's remedy.
The court also held that the clause excluding liability for indirect or consequential loss was unreasonable. The court made reference to unequal bargaining power and a lack of clear specification of the goods, among other reasons for their findings. Ultimately, however, the defendant's counterclaim failed on the basis that the court found the goods to be of satisfactory quality.
In the context of UK domestic, business format franchising, the bargaining power of the parties to a franchise agreement will rarely be equal. It is important for franchisors to create a standardised contractual framework which enables the franchisor to maintain the common identity of the network but which limits systemic risk as much as possible. A franchisor needs the contractual power to operate and police the network effectively, which benefits both the franchisor and its compliant franchisees.
Viewed in this context, it is understandable why so many franchise agreements have unilateral exclusions and limitations of their liability to a franchisee; such clauses may be deemed reasonable, depending on the facts. Nevertheless, franchise agreements and network supply terms are not exempt from the Unfair Contract Terms Act per se and this ruling therefore underscores the importance of regularly reviewing standard contractual exclusions and limitations to ensure that they have been carefully considered and drafted to fit the specific risks in the relevant business.
For further information on this topic please contact Gordon Drakes at Fieldfisher by telephone (+44 20 7861 4000) or email (email@example.com). The Fieldfisher website can be accessed at www.fieldfisher.com.
(1) Saint Gobain Building Distribution Ltd (t/a International Decorative Surfaces) v Hillmead Joinery (Swindon) Ltd  EWHC B7 (TCC).
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