UK: Franchising Comparative Guide

1 Legal and enforcement framework

1.1 Which legislative and regulatory provisions govern franchising in your jurisdiction?

There are no franchise-specific laws or regulations in the United Kingdom. Franchising is regulated by general commercial law and competition law.

1.2 Do they apply to foreign franchisors entering your jurisdiction or only to domestic franchises?

They apply to both foreign and UK franchises.

1.3 Do any special regimes apply in specific sectors?

No.

1.4 Which bodies are responsible for enforcing the applicable laws and regulations? What powers do they have?

As there are no franchise-specific laws, there are no bodies responsible for enforcing them. Competition law is enforced by Competition and Markets Authority.

1.5 What is the regulator's general approach in regulating the franchise sector?

Not applicable.

1.6 Are there any trade associations for the franchise sector? If so, what are the conditions for membership? What are the commercial implications of not being a member?

The British Franchise Association is the established trade association for franchising in the United Kingdom. It is a member of the European Franchising Association (EFA) and its Code of Ethics is based on that of the EFA.

2 Franchise market

2.1 How mature is the franchise sector in your jurisdiction?

It is very well established, dating back to the 1960s.

The latest British Franchise Association (BFA) and NatWest Survey (2018) states that the franchise sector contributes in excess of £17 billion to the UK economy and employs 700,000 people¹. It identifies personal services, hotel and catering, along with store retailing, as the biggest growth areas. Although this is now somewhat old data, the general trend seems to prevail.

The BFA figures do not include the number for traditionally non-franchise corporations that use franchising as a key part of their international strategy, such as Marks & Spencer; or the numerous independent schools that have used franchising structures to establish themselves abroad, such as Westminster, Wellington and Dulwich. The total contribution of franchising to the national economy is therefore probably significantly higher than the BFA/NatWest Survey suggests.

2.2 In which sectors is franchising most common?

Franchising is well established in the food and beverage, retail, and hotel and leisure sectors. It is also well established in the service sector. In recent years, it has also been used in the healthcare and education sectors.

2.3 Who are the biggest and most successful franchisors in your jurisdiction? How are they typically structured?

All of the long-established franchise brands – such as McDonalds, Burger King, Domino's, Pizza Hut, Papa John's, Nando's, KFC and Costa – are well established in the United Kingdom. They are all successful and have a healthy market share.

Service franchisors – such as Neighborly, Chips Away and DynoRod – are also very successful.

The majority use a unit franchise approach. Multiple unit franchises are common. Many of these have a portfolio of different franchise brands. Regional franchises and sub-franchises are not commonly used.

3 Franchising models

3.1 Is master franchising or the multi-unit development model most common in your jurisdiction? Is there a perceptible trend in one direction or the other?

This depends on the nature of the business. Most foreign food and beverage and retail franchises tend to use a master franchise structure, although those that require significant investment (e.g., TGI Fridays) tend to use a development model.

In the UK hotel industry, the franchise model and the management model are used in equal measure.

3.2 What other models of franchising are commonly used in your jurisdiction?

Franchisees who are multi-unit and multi-brand operators (MUMBOs) are common in the food and beverage sector in particular. In most cases MUMBOs operate multiple sites for each of their franchised brands and enter into multiple unit franchise agreements with franchisors.

3.3 What are the potential advantages and disadvantages of these different models in your jurisdiction?

MUMBOs deliver great experience and expertise in the roll-out of franchised concepts. They have their own infrastructure which specialises in implementing and rolling out established franchise concepts in the United Kingdom. They often place a portfolio of brands in close proximity to each other and so increase their efficiency. The downside can be that they have significant bargaining power and are not solely focused on a single franchise brand.

3.4 What specific considerations should be borne in mind in the case of cross-border franchising into your jurisdiction?

The United Kingdom is a common law jurisdiction and so it is important that franchise agreements are drafted appropriately. Civil law franchise agreements are generally not appropriate and need a good deal of amendment before they are fit to use in the United Kingdom.

Scotland and Northern Ireland have slightly different legal systems. In particular real estate law is very different in Scotland.

For franchise systems based outside the EU, amendments will need to be made to franchise agreements to deal with the impacts of UK competition and data protection laws.

4 Definitions and scope of application

4.1 How is 'franchising' defined in your jurisdiction?

There is no formal legal definition of a 'franchise' under English law.

4.2 What are the key requirements that apply to franchising?

Subject to the Trading Schemes Act mentioned below, there is no requirement for pre-contractual disclosure or for registration. There are no mandatory provisions that must be included in franchise agreements. Multi-level franchising is usually caught by the Trading Schemes Act. This requires a formal approach to the drafting of the agreement and various warnings must be included. This requirement is generally avoided by requiring all franchisees to be registered for value added tax – an exemption that is made available by a statutory instrument issued under the Act.

4.3 Is registration of the franchise agreement, a trademark licence or other documentation required?

There is no requirement for the registration of a franchise agreement, trademark licence or other franchise documentation in the UK.

4.4 Are mandatory contract terms imposed?

No.

4.5 What specific activities (if any) are prohibited under the franchising laws and regulations? What are the potential consequences of breach?

Not applicable.

5 Initial steps

5.1 Are there any restrictions on foreign franchisors entering your jurisdiction?

No.

5.2 Are franchisors required to establish a local presence? If so, what is the most common corporate structure adopted by foreign franchisors entering your jurisdiction?

Franchisors are not required to establish a local presence. If foreign franchisors do set up a corporate entity in the UK it is usually a private limited liability company.

5.3 What requirements or restrictions apply with regard to the selection and recruitment of franchisees?

None.

5.4 Are franchisees subject to any legal obligations when purchasing a franchise?

No.

6 Disclosure and due diligence

6.1 What pre-contractual disclosure requirements apply to franchisors in your jurisdiction?

None.

6.2 What formal, substantive and procedural requirements apply with regard to the disclosure document in your jurisdiction?

None.

6.3 What pre-contractual disclosure requirements apply to franchisees in your jurisdiction?

None.

6.4 What are the consequences of any breach of the pre-contractual disclosure requirements?

Not applicable.

6.5 What other due diligence should the parties undertake before entering into a franchise agreement?

None is required by law.

6.6 Are there any restrictions imposed upon franchise brokers in your jurisdiction?

No.

6.7 Are franchisors permitted to provide pre-sale information on operational performance (eg, financial performance representations or earnings claims), or are such statements regulated or banned?

Such statements are not regulated under a specific UK franchise law/regime or banned. The BFA Code of Ethics requires its franchisor members to disclose information relating to its business and financial position to the franchisee but there is no statutory or other pre-contractual obligation on franchisors to disclose relevant facts. However, if financial performance statements or earnings claims are found to be incorrect, this can lead to a claim by the franchisee against the franchisor for misrepresentation.

If the misrepresentation is found to be fraudulent or negligent, the franchisee may have the right to withdraw from the contract (recission) and claim damages. An innocent misrepresentation can lead to recession (unless the court awards damages in lieu of rescission).

7 Franchise agreement

7.1 What formal, substantive and procedural requirements apply with regard to the franchise agreement in your jurisdiction? Are there any mandatory terms? What terms are typically included in the agreement?

None.

7.2 Do any specific requirements apply regarding the governing law or jurisdiction of the franchise agreement?

No.

7.3 Does the franchisor have any mandatory rights and obligations under the franchise agreement?

No.

7.4 Does the franchisee have any mandatory rights and obligations under the franchise agreement

No.

7.5 What restrictions can the franchisor impose on the franchisee's activities under the terms of the franchise agreement (eg, purchasing requirements, non-compete obligations, exclusivity, price control)?

See section 11 (Competition) below.

7.6 Is there a duty of good faith imposed upon the franchisor and franchisee?

Although there is no historic obligation of good faith in the United Kingdom, recent jurisprudence has developed this area of law and it is now of great relevance to franchising in the United Kingdom, although there is still conflicting case law as to when it will be implied and what such an obligation means in practice.

Yam Seng PTE Ltd v International Trade Corporation Ltd [2013] EWHC 111 (QB) concluded that 'good faith' in the sense of honesty should be implied into commercial agreements which are relationship based and which require ongoing communication and cooperation between the parties, singling out "some joint ventures, franchise and distribution agreements"– or more generally what the judge called "relational agreements" – as examples of agreements where implied good faith was appropriate. The judge held that good faith is recognised in most civil law systems and many US states, and is "gaining ground" in Canada and Australia; and that English law would be "swimming against the tide" if it resisted it. He further held that good faith simply gives effect to the "presumed intention" of the parties: implying a term of honesty reflects the shared values and norms of the parties.

The question of whether a duty of good faith will be implied into a 'relational' agreement has been examined in a number of cases since Yam Seng. One notable case is Carewatch Services Ltd v Focus Caring Services Ltd [2014] EWHC 2313 (Ch). This was the first case in which the Yam Seng principles were considered in a franchise relationship. The defendant franchisee tried, unsuccessfully, to argue that (among other alleged implied terms) the franchise agreement contained an implied term that the parties would conduct themselves in "good faith and/or deal with each other fairly and in particular not in a manner that would damage each other's business interests".

The judge in Carewatch did not regard Yam Seng as authority for the proposition that there is a general obligation of good faith implied into all commercial agreements, even relational ones, or that there is some sort of positive obligation implied that a party to a contract should subordinate its own commercial interests to those of the other contracting party.

The Carewatch case illustrates that the Yam Seng principles will be applicable only in the right case and on the right facts. However, it is clear that a standard of good faith is taking shape under English commercial contract law and is an important consideration in franchise relationships.

There is also some uncertainty as to what an obligation of good faith actually means in practice. The Court of Appeal in the more recent case of Bates v The Post Office imposed a higher standard on parties who are subject to an obligation of good faith and held that such an obligation means "the parties must refrain from conduct which in the relevant context would be regarded as commercially unacceptable by reasonable and honest people. Transparency, cooperation and trust and confidence are, in my judgment, implicit within the implied obligation of good faith".

Some franchisors elect to impose an express obligation of good faith in their franchise agreements and define what that obligation means in an attempt to provide more certainty on the issue.

7.7 What are the parties' rights and obligations in relation to renewal of the franchise agreement, and what is the process for renewal?

This is up to the parties to agree.

7.8 What formal, substantive and procedural requirements apply with regard to termination of the franchise agreement in your jurisdiction?

This is up to the parties to agree.

7.9 Are there any restrictions on repatriating funds out of your jurisdictions?

No.

7.10 Are there any withholding taxes that apply to franchising in your jurisdiction (not including the effect of double taxation treaties)?

The UK imposes withholding taxes on payments of interest and royalty payments in respect of Intellectual Property (IP) (currently at a rate of 20%). IP is defined widely to include, inter alia, any patent, trademark, design, model, plan or secret formula or process, and therefore may include certain licence payments under a franchising agreement. A payer of a royalty need not deduct withholding tax (or can withhold at a lower rate) if it has a reasonable belief that the recipient is entitled to relief under a double tax treaty. The position for withholding tax on interest payments is different: payers of interest must obtain confirmation from HMRC that the recipient is entitled to relief under a treaty.

8 Operational standards

8.1 What legal status does the operations manual have in your jurisdiction?

This depends on how the franchise agreement is drafted. It is advisable not to expressly include the manual as a term of the agreement as an amendment to a contract generally requires the agreement of both parties.

8.2 How can the franchisor ensure compliance with its operational standards during the term of the franchise agreement?

Appropriate drafting of the franchise agreement is essential.

8.3 Can the franchisor make unilateral changes to its operational standards during the term of the franchise agreement?

It can make such changes if there is an express provision in the franchise agreement stating that the franchisor can unilaterally change the operating standards; otherwise, this will not be permitted.

9 Intellectual property

9.1 How are brands protected in your jurisdiction and what specific implications does this have in the franchising context?

To protect the franchisor's brand, it is important that the franchisor's trademarks and domain names are correctly registered.

For UK trademarks, applications are made to the UK Intellectual Property Office (UKIPO).

The franchisor will need to determine which of its goods and services should be subject to registered trademark rights for the purposes of the franchise business and provide a description of each. It is often advisable to seek the advice of a specialist trademark solicitor when preparing the trademark application, in particular regarding which goods and services should be included in the trademark specification. For UK trademarks registered with the UKIPO, the classification system is divided into different classes, with goods in Classes 1 to 34 and services in Classes 35 to 45.

It is important to ensure that the franchisor's registered trademark specifications are sufficiently broad to cover all goods and services currently offered by the franchise business, to ensure that no other entity can use identical or similar trademarks in relation to identical or similar goods and services, thus causing the consumers of the franchise business to be confused as to the origin of the goods and/or services being offered to them. The trademark specification should also cover goods and services that the franchise business might be looking to expand into in the future and thus not limit the direction of the franchise business.

In relation to domain names, as with the searches, there is no centralised system for domain name registration; therefore, registration of a domain name is carried out through a registrar. There are a large number of registrars and the choice of registrar will be determined by price, reputation for reliability and other services offered, such as website hosting and domain name portfolio management. A domain name is registered for a set period (e.g., two years) and will have to be renewed once that period is up.

With regard to enforcement for registered trademarks, if cease-and-desist style letters fail to resolve the issue, the franchisor can seek injunctive relief to stop the infringing use by the franchisee (or third party) together with a claim for damages or an account of profits unlawfully made by the franchisee. In determining whether injunctive relief should be granted, the court will have regard to the balance of convenience between the parties' interests and the prospect of unquantifiable or irreversible harm (or both).

With unregistered trademarks, a claim can be brought under the common law for the tort of passing off. The franchisor will be required to establish that:

• it has goodwill in its unregistered marks;
• the franchisee has made misrepresentations to customers or prospective customers that amount to a false imitation of the franchisor's branded goods or services; and
• as a consequence of the franchisee's actions, the franchisor has suffered loss (i.e., loss or diversion of business).

As passing-off actions tend to be more complex and costly than relatively simple trademark infringement actions, well-advised franchisors tend to invest in a brand protection (including searches) and registration programme at the outset.

9.2 How are other intellectual assets of the franchisor (eg, know-how, trade secrets) protected in your jurisdiction and what specific implications does this have in the franchising context?

Know-how must be protected contractually. There is no specific trade secrets law in the UK.

In respect of domain name actions, proceedings can be initiated against cybersquatters and others that infringe trademarks through use of a domain name. The relevant rules and procedures differ depending on the type of domain name. For example, disputes over '.com', '.net' and '.org' domain names are governed by the Internet Corporation for Assigned Names and Numbers Uniform Domain Name Dispute Resolution Policy (UDRP); while disputes over '.co.uk' domain names are governed by the Nominet Dispute Resolution Service policy. Disputes under the UDRP are heard by a number of tribunals, such as the World Intellectual Property Organisation (WIPO).

Disputes in relation to UK domain names are heard by the Nominet Dispute Resolution Service. Domain name dispute resolution proceedings are generally simple and low cost. Proceedings are conducted on paper and hearings are extremely rare.

With regard to the protection of IP rights such as copyright and items such as know-how and confidential information, much as with trademarks, the franchisor's enforcement options will initially start with correspondence between the franchisor's and franchisee's legal advisers, which, if unsuccessful, may result in an application for an injunction by the franchisor and, depending on the nature of the franchisee's conduct, a subsequent court-based trial to determine the franchisor's possible remedies.

10 Employment

10.1 What is the applicable employment regime in your jurisdiction and what specific implications does this have in the franchising context?

Under English law, in a genuine franchisor-franchisee relationship, franchisees are not and cannot be treated by the courts as employees.

10.2 Can franchisees be deemed to be employees of their franchisor?

No.

11 Competition

11.1 What is the applicable competition regime in your jurisdiction and what specific implications does this have in the franchising context?

Franchising is regulated by the Competition Act 1998 (Act), which is based on pre-Brexit EU competition law. The Competition (Amendment etc) (EU Exit) Regulations 2019 (SI 2019 No 93) made legislative revisions adapting the EU competition regulations to become a set of domestic competition regulations. It revoked the EU procedural regulations and revised the substantive regulations including block exemptions by removing specific EU or inter-state references.

Article 101 of the Treaty on the Functioning of the European Union (TFEU) continues to apply post-Brexit to agreements or conduct of UK businesses that have an effect within the European Union, in much the same way as agreements or conduct of US and Asian businesses are currently subject to EU competition law where their agreements or conduct affect EU markets.

The substance of UK competition law is very similar to that of EU competition law. Section 60A of the Act requires the Competition and Markets Authority and courts to avoid inconsistency between their decisions and EU law and the decisions of the CJEU before exit day.

Previous position in relation to vertical block exemption regulations in the UK

The Competition (Amendment etc) (EU Exit) Regulations has retained the EU block exemption regulations, namely, the Vertical Agreement Block Exemption Regulation (VBER).

Up until 1 June 2022, the 2010 VBER applied to vertical agreements in the UK despite Brexit. The Competition Amendment (EU Exit) Regulations 2019 ('the Amendment Regulation') introduced every provision of the current block exemption regulations into UK competition law by removing any reference to the EU or internal market. Post-Brexit transition, the retained exemptions operated as exemptions from domestic competition law prohibitions for as long as they remained in force.

Current position in relation to block exemption regulations in the UK

On 1 June 2022, the old VBER expired and new rules came into force in the UK and the EU. Specifically in the UK, the new Vertical Agreements Block Exemption Order (VABEO) was introduced, which had a transition period of one year, meaning that agreements entered into before 1 June 2022 that complied with the 2010 VBER remained exempted until 1 June 2023. This means that Franchisors have until 1 June 2023 to get up to speed with the new rules and update their agreements if they do not comply.

The VABEO will be in force until 1 June 2028. This gives it a five-year life span from the end of the one-year transition period.

Chapter 1 of the Act prohibits agreements which have as their object or effect the prevention, restriction or distortion of competition within the UK and which may affect trade within the UK. Section 9 of the Competition Act 1998 sets out the exception to this prohibition for agreements, which contribute to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefits. Competition law has long established that vertical agreements may be able to benefit from the exemption.

Vertical agreements do not generally give rise to competition concerns unless one or more of the parties to the agreement possesses market power or the agreement forms part of a network of similar agreements. In recognition of this fact, by automatically exempting vertical agreements which meet specified conditions, the VABEO avoids placing on businesses the unnecessary burden of scrutinising a large number of essentially benign agreements.

The VABEO automatically exempts, through a safe harbour, vertical agreements which comply with a set of criteria, namely:

• the parties each have a market share below 30%; and
• the agreement does not contain any hardcore restrictions.

VABEO hardcore restrictions

The VABEO contains an updated list of hardcore restrictions. The inclusion of hardcore restrictions within a vertical supply chain agreement will bring the entire agreement outside of the safe harbour created by the block exemption. The hardcore restrictions are as follows:

• Resale Price Maintenance;
• Territorial and Customer restrictions;
• Restrictions of cross-supplies within a selective distribution system;
• Restriction of the sales of spare parts; and
• Wide Retail Parity Obligations.

Imposing a fixed or minimum resale price on franchisees is a hardcore restriction referred to as Resale Price Maintenance. Franchisors can publish recommended retail prices or impose maximum resale prices, as long as in practice they do not amount to fixed prices. There is however one notable exception, which explicitly mentions franchise systems. Fixed resale prices are acceptable in the context of a coordinated short term (two to six week) low price campaign.

VABEO excluded restrictions

There are also excluded restrictions included in the VABEO. The inclusion of an excluded restriction will not bring the entire agreement outside of the safe harbour. Instead, only the excluded restriction itself will be subject to a self-assessment. The three excluded restrictions included in the VABEO are:

• Non-compete obligations;
• Post term non-compete obligations; and
• sales of competing goods in a selective distribution system.

In terms of non-compete obligations in franchises, it is acceptable for non-competes to be for a term longer than five-years in a franchise agreement. However, non-competes should never exceed the duration of the franchise agreement itself. Post-term non-compete restrictions, which are common in franchise agreement must fulfil a set of criteria in order to be acceptable. They must:

• be limited to the premises from which the franchisee operated;
• be indispensable to protect know-how;
• be of a duration limited to one year post term; and
• the post term non-compete must relate to goods or services which compete with the franchise goods or services.

Other aspects of the VABEO specifically relevant to franchises

The VABEO contains specific rules relating to franchise agreements. However, vertical restraints contained in franchise agreements will be assessed under the guidance applicable to the distribution system that most closely corresponds to the nature of the particular franchise agreement. For instance, a franchise agreement that gives rise to a closed network since franchisees are prohibited from selling to non-franchisees are to be assessed under the principles applicable to selective distribution.

A franchise agreement will usually contain intellectual property rights (IPR) licensing relating to particular trademarks and/or know how. The VABEO guidelines provide a list of the type of IPR related restrictions that would be considered legitimate in a franchise network. If captured by the Chapter 1 prohibition, such restrictions will likely benefit from the safe harbour of the VABEO. They include the following list of permitted restrictions:

• An obligation on the franchisee not to engage, directly or indirectly in any similar business;
• An obligation on the franchisee not to use know-how licensed by the franchisor for purposes other than the exploitation of the franchise; or
• An obligation on the franchisee to communicate to the franchisor any experience gained in exploiting the franchise and to grant the franchisor, and other franchisees, a non-exclusive licence for the know-how resulting from that experience.

12 E-commerce

12.1 How is e-commerce regulated in your jurisdiction and what specific implications does this have in the franchising context? Can franchisees be prohibited from using e-commerce in their businesses?

UK competition law reflects that of the European Union and as a result very few restrictions are allowed regarding the right of franchisees to use e-commerce.

13 Consumer protection

13.1 What consumer protection measures are applicable in your jurisdiction and what specific implications do these have in the franchising context?

Franchisees are not seen as consumers and therefore the consumer protection laws have no impact on the recruitment of franchisees in the United Kingdom. Notwithstanding this, it is important for franchisors to be fully aware of consumer-facing laws, as these will nevertheless have an impact on the franchisor, whether dealing with consumers directly or through its franchisees.

A franchisor will need to ensure there are suitable provisions in the franchise agreement requiring its franchisees to comply with all consumer protection legislation.

The Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013 ('Consumer Contracts Regulations') contain provisions that are relevant to all franchisors and franchisees that deal with consumers (referred to in the legislation as 'traders'). These have a particular effect on the protections available to consumers when they purchase goods or services using a means of distance communication such as the internet. The Consumer Contracts Regulations require all traders to provide consumers with certain specific pre-contractual information prior to entering into any contract (e.g., on the total costs of the relevant products or services, and the arrangements for payment and delivery). Where orders are placed using the internet or other electronic means, the trader must clearly label the order button to indicate that placing the order entails an obligation to pay (e.g., by using words such as "order with obligation to pay"). For distance contracts, traders in most circumstances must also offer consumers a period of 14 calendar days in which they can cancel the contract (known as the "Cooling-off period"). The Consumer Contracts Regulations also contain specific provisions governing refunds, returning goods, delivery and risk, inertia selling and helpline charges; and rules on the supply of digital content.

A large proportion of domestic consumer law was codified under the Consumer Rights Act 2015. This act is a complex piece of legislation, but key provisions include the following:

• a fairness test applicable to most terms of business-to-consumer (B2C) contracts which, if failed, results in the infringing term being unenforceable against the consumer;
• a transparency test that requires all terms of B2C contracts to be in plain and intelligible language, failing which a court will take the most consumer-friendly interpretation of the term at issue;
• implied warranties in all B2C contracts that vary depending on whether the subject matter of the contract is the provision of goods, services or digital content; and
• implied remedies available to a consumer for breach of contract by a business.

Other important consumer laws include:

• the Consumer Protection from Unfair Trading Regulations 2008, which prohibit various unfair commercial practices by traders, such as providing misleading information or omitting material information, and include a blacklist of commercial practices that are automatically prohibited (e.g., 'bait advertising'); and
• the E-Commerce Regulations 2002, which require website operators to provide additional specific information about themselves and their goods/services before forming a binding contract with a consumer.

On 25 April 2023, the Digital Markets, Competition and Consumers Bill was introduced into the UK Parliament. The Bill will provide greater enforcement powers to the UK's key consumer regulator (the Competition and Markets Authority) and will also reform the position on subscription-based models and fake/incentivised reviews. The Bill, however, remains in draft form at the time of writing.

13.2 Are franchisees covered under any of these consumer protection measures?

No.

14 Data security and cybersecurity

14.1 What is the applicable data protection regime in your jurisdiction and what specific implications does this have in the franchising context?

In General Data Protection Regulation (2016/679) (GDPR) came into force in May 2018. The United Kingdom retained the GDPR (as UK GDPR) and its implementing legislation the Data Protection Act 2018 after Brexit.

The GDPR has a wide territorial scope and applies to organisations based not only within, but also outside the UK if they monitor or offer goods and services to individuals based in the UK. The GDPR increases the obligations on those who process personal data, and individuals will have stronger rights. It contains strong powers of enforcement for national data protection authorities, with powers to fine organisations up to £17.5 million or 4 per cent of their total worldwide annual turnover for infringements.

The GDPR applies to the processing of personal data held electronically or in structured paper files and it places obligations on controllers and processors of the data. 'Personal data' is information that relates to an identified or identifiable living person, such as (i) a consumer or (ii) a member of staff. The controller is 'the natural or legal person, public authority or agency or any other body which, alone or jointly with others, determines the purposes and means of the processing'. By contrast, the processor is the 'natural or legal person, public authority, agency or other body which processes personal data on behalf of the controller'.

Rarely the relationship between franchisors and franchisees will be one party providing processor services to the other. If that's the case, mandatory wording meeting Art. 28 of the GDPR needs to be included in franchise agreements.

In most cases both parties will be independent controllers or joint controllers. Where independent controllership is recognised, no prescriptive provisions under the GDPR need to be contained in franchise agreements. The same is not true in cases of joint controllership. As a preliminary remark, it is worth noting that the CJEU case law established that the threshold for being a joint controller is low. A joint controller relationship between the parties is likely to be found where:

• franchisor and franchisee make joint decisions over the processing (what data is collected, why it is collected, where it should be stored, how it should be stored);
• franchisor and franchisee agree to use common information systems and are bound by the same security standards;
• franchisor and franchisee share data for joint advertising/marketing purposes – or jointly decide on marketing activities, even if only one of the parties has access to the personal data;
• franchisor and franchisee analyse franchisee staff performance and when franchisor participates in decisions relating to disciplinary/termination of employment of franchisee staff;
• franchisor receives website analytics from franchisee's websites (because it benefits both parties and franchisee made the decision to allow the processing); and/or
• customer lead generation activities are carried out between franchisor and franchisee.

Where there is joint controllership between the parties the nature of the arrangement needs to be documented in line with Article 26 GDPR so as to allocate GDPR responsibilities between the parties (such as who will inform the data subjects regarding the data processing, who will be responsible for handling data subject requests, etc.). The essence of the arrangements also needs to be made clear to the data subjects through privacy notices of the parties (e.g. which party should the data subject contact to exercise their data subject rights under the GDPR).

Where personal data is shared among the wider franchise group, this would be documented under intra-group agreements. Where personal data is shared with franchisors or franchisees outside the UK where there is no adequacy regime with the recipient jurisdiction (e.g. China, India), then the parties must put appropriate data transfer agreements under Chapter 5 GDPR (e.g. UK IDTA or UK addendum if associated with EU SCCs) and the data exporter must conduct transfer impact assessments where necessary. If a UK franchisee needs to transfer personal data to its Canadian franchisor, this is currently permitted under the adequacy regime which allows data transfers to commercial organisations in Canada. The UK is currently also in the process of negotiating a data adequacy agreement with the US to allow easier transfers of data between the UK and the US (however this is still a work in progress).

Franchisors and franchisees that are established in the UK must notify the UK Information Commissioner's Office of their data processing activities and pay an annual registration fee, which is calculated with respect to their annual turnover (unless (narrow) exemptions apply).

Other obligations include the requirement to abide by the data protection principles. In summary, these specify that personal data shall be: processed lawfully, fairly and in a transparent manner; collected for specified, explicit and legitimate purposes; adequate, relevant and limited to what is necessary; accurate and up to date; kept for no longer than necessary; and kept securely.

There is also an accountability principle, which requires a controller to be able to demonstrate that it has followed the relevant principles. This will be evidenced by adopting data protection by design and by default, developing policies and procedures, staff training programmes and undertaking audits. Controllers and processors are required to maintain records of processing activity (which replaces the notification regime) and carry out privacy impact assessments in certain circumstances. Data protection officers may also have to be appointed. Under the GDPR, controllers are obliged to notify the UK data protection authority without undue delay and, in any event, within 72 hours of becoming aware of a personal data breach. A similar obligation but with a different timing obligation applies towards affected individuals in certain circumstances.

Individuals have rights under the GDPR which they can exercise against the controllers, including:

• the right to access their personal data processed by or on behalf of the controller;
• the right to demand, in certain circumstances, that their personal data be transferred to a replacement service provider (the 'right to data portability');
• rights in respect of automated decisions; and
• the right to demand erasure (the 'right to be forgotten').

Regarding GDPR requirements, the franchisors often provide GDPR guidance and compliance policies to their franchisees to ensure uniform application of the GDPR throughout the franchise without any hiccups.

There are additional privacy rules relating to the use of electronic communications set out in the UK in the Privacy and Electronic Communications Directive 2002/58 EC (as amended). There are also provisions that apply to all organisations making use of electronic communications, including:

• requirements for (i) notice and (ii) consent to use cookies and similar technologies (unless exemptions apply); and
• rules relating to business-to-consumer unsolicited electronic marketing (e.g., email, fax, text), which can require opt-in consent in some situations.

These rules will be more relevant as franchisors and franchisees look to engage consumers across a variety of channels. For example, if a franchisor wants the right to control the e-marketing campaigns to all consumers, its franchisees often have to provide access to their consumer databases as a matter of course. If this is the case, the parties need to think carefully about the relevant consents that may be required (particularly given the tougher requirements for obtaining valid consent under the GDPR which needs to be specific, informed and refusing consent should be without detriment to the individual). These rules are also relevant to organisations involved in targeted advertising programmes or that are interested in profiling their customers based on their online behaviour and browsing activities.

Loyalty schemes are another area where the rules can apply. In particular, organisations need to be clear who is participating in the scheme and whether they have appropriate consents to be able to contact the customers.

14.2 What cybersecurity obligations are applicable in your jurisdiction and what specific implications does this have in the franchising context?

With the ever-growing importance of data in the global economy, the bad actors are targeting the custodians of the data for cyberattacks. As a rule of thumb, the larger the data set (e.g., the combined data of the franchise members), the bigger the target for such bad actors. Franchisors and franchisees are becoming increasingly aware of the need to protect essential assets such as customer databases from theft, damage, destruction or unauthorised use and in particular from the threats posed by cyberattacks. Franchisors and franchisees will need to identify what assets need to be protected, identify the impact a cyberattack could have on their business, and have in place measures to protect the business (e.g., increased security controls, malware protection, restrictions on the use of removable media).

This is a rapidly evolving field that is increasingly attracting regulatory attention. GDPR is not the only legislation that requires data to be protected by appropriate technical measures or data breach notifications to be made to regulators for cyber incidents. For example, there are already European laws (which predate the GDPR) requiring certain telcos and Internet Service Providers to notify security breaches to both the regulator and the affected individuals.

In July 2016, the Network and Information Security Directive (the NIS Directive) was adopted, and Member States (including the UK which was a Member State at the time) had until 9 May 2018 to implement its provisions into national laws and a further six months to identify 'operators of essential services'. This Directive set out measures designed to ensure critical IT systems in central sectors of the economy such as banking, energy, health and transport are secure. It applies to operators of such essential services and to 'relevant digital service providers'. Each EU country determined which organisations in their jurisdiction are operators of essential services and subject to the rules in line with criteria set out in the Directive, and also its own 'effective, proportionate and dissuasive' penalties for infringement of the same. All organisations in these sectors that are identified by the Member States as operators of essential services have to take appropriate security measures and notify significant incidents to the relevant national authority. The same applies to all entities that meet the definition of relevant digital service providers. Organisations which fail to put in place effective cyber security measures can be fined as much as £17 million for non-compliance. Micro and small enterprises are excluded from the scope of the NIS Directive.

The GDPR and the NIS Directive address different matters: the GDPR concerns personal data while the NIS Directive address the security of systems, but there is considerable overlap as security considerations are relevant to both, and most organisations covered by the NIS Directive will be data controllers (as well as being data processors in some situations).

The NIS Directive applies to fewer organisations but is expected to have a knock-on impact for suppliers to relevant digital service providers and operators of essential services. NIS incidents can be (but are not always) a personal data breach under the GDPR, which is reportable to the competent authority (under the NIS Directive) and the data protection authority (under the GDPR). As the GDPR and NIS Directive are separate laws, organisations may face regulatory action (including monetary penalties) under both pieces of legislation. The EU decided to adopt the NIS2 Directive at the end of 2022 and was followed by the UK Government's announcement that the UK would also update its cyber laws, which will apply to critical service providers, as well as important digital services such as the providers of cloud computing and online search engines.

Other changes will include requiring essential and digital services to improve cyber incident reporting to regulators such as Ofcom, Ofgem and the ICO. This includes notifying regulators of a wider range of incidents that disrupt services, or which could have a high risk or impact to their service, even if they don't immediately cause disruption.

15 Disputes

15.1 In which forums are franchising disputes typically heard in your jurisdiction (ie, courts or arbitration)?

In domestic franchise disputes, depending on the nature of the franchisee's conduct or breach, a franchisor may seek an injunction to either stop or compel certain conduct by the franchisee. For most breach of contract claims, litigation as opposed to arbitration is the typical form of dispute resolution in the United Kingdom.

The English courts will recognise and uphold foreign choice of law and jurisdiction clauses. It is, however, advisable to ensure that a franchise agreement is reviewed by an English law expert in franchising to ensure that there are no clauses that would be unenforceable or contrary to public policy.

It may take between 12 and 18 months before a dispute reaches full trial. By this point, the restrictive covenants (and the injunction) will most likely have expired and the dispute will primarily focus on the level of harm suffered by the franchisor and the level of damages to which the franchisor (if successful) is entitled.

15.2 Is mandatory non-binding mediation commonly used in franchising in your jurisdiction?

While mediation is a recognised form of alternative dispute resolution and is actively encouraged by the Civil Procedures Rules, it is not mandatory.

The parties can incorporate a mandatory mediation process in the dispute resolution clause in the franchise agreement, which is likely to be upheld by the courts in the United Kingdom, but mandatory mediation clauses are not particularly common. It is more usual to include a non-mandatory mediation option in a dispute escalation clause.

There is no specific procedure for franchise disputes in the United Kingdom – most are settled before reaching formal alternative dispute resolution methods or court-based litigation.

The British Franchise Association (BFA) offers both a mediation scheme and an arbitration scheme, although the latter has not experienced a significant take-up rate. Before the parties engage in mediation or arbitration, the BFA also offers an informal conciliation scheme, aimed at facilitating an amicable discussion between the parties and allowing each of the parties to make representations about their case. It is more common for international franchisors and parties in more sophisticated disputes, to elect to use one of the more experienced international mediation bodies, such as the Centre for Effective Dispute Resolution CEDR.

15.3 Is arbitration in your jurisdiction subject to any special requirements? Is your jurisdiction a party to the New York Convention?

Arbitration is not subject to any special requirements.

The United Kingdom is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitration Awards, and the English courts will generally readily recognise and enforce foreign arbitral awards from other convention countries.

15.4 Can class actions be brought in your jurisdiction? If so, what specific implications does this have in the franchising context?

Class actions can be brought, but the process is rather cumbersome. Franchisee class actions are not common.

15.5 Have there been any recent cases of note?

The recent case of Dwyer (UK Franchising) Limited v Fredbar Limited and Shaun Rowland Bartlett [2022] EWCA Civ 889 has caused surprise and concern in the franchising industry in the UK. The reason why the case has caused such concern is that post-termination restrictive covenants are clauses that are very common in territory based franchise agreements and have been held to be enforceable by the courts in a number of previous cases.

In this specific case, the franchisee challenged a restrictive covenant on the basis that it went further than was reasonably necessary to protect the franchisor's goodwill in the territory. The Court of Appeal ruled in favour of the franchisee held that the franchisee was correct and the restrictive covenant was unreasonably wide and therefore unenforceable. On the face of it, this is a very worrying precedent as it was a fairly standard form restrictive covenant and so it therefore appears that the decision could have a considerable impact on many UK franchise agreements. However, the decision was also quite fact specific and the franchisee's situation can be distinguished from that of many other franchisees.

The key points of the case and judgment are set out below.

• The franchisee was inexperienced and naive and had given up paid employment to become a franchisee. He had no prior business experience and had taken considerable financial risk in entering into the franchise agreement. This seemed to be quite an important factor for the court.
• The franchisee did not take legal advice and the franchise agreement was presented very much on a 'take it or leave it' basis. There were internal notes to show that the franchisor did not think the individual would make a very good franchisee but offered the agreement anyway and the franchisee was provided with financial projections which, whilst held not to amount to misrepresentations, did not accurately reflect the figures achieved by the franchisee.
• The Court of Appeal considered that the failure of the franchisee was foreseeable as the projections were far from what was actually achieved and the franchisor knew that the financial consequences of failure could be serious for the franchisee.
• For the above reasons, the Court of Appeal decided that there was a considerable inequality of bargaining power between the franchisor and the franchisee and this point was crucial to the Court's decision. It is also apparent there was a good deal of sympathy for the franchisee who was very much seen as the innocent victim in the dispute.
• The Court also held that the relationship was more akin to an employer/employee relationship rather than a business to business relationship. This is quite different from previous franchising cases where the courts have specifically held that it is not an employment or consumer relationship but more similar to a business sale agreement when considering the enforceability of restrictive covenants². As a result of deciding that the relationship was more akin to an employment relationship, the Court of Appeal considered that the restrictive covenants should be viewed more from an employment law perspective.
• The franchisee took on a virgin territory and, whilst the Court did accept that the Drain Doctor name (under which the franchisee traded) had good brand awareness in the UK, it was not a 'big brand' franchise. This was another key factor for the Court as it held that the franchisee had not built up significant goodwill in the territory, which is what the franchisor is normally entitled to protect. The franchisee only traded for around 18 months, part of which was during the pandemic. The franchisee therefore did not build up the type and size of business as was expected and again this was a significant factor for the court when deciding whether the one year post termination non-compete was enforceable and reasonable in terms of the goodwill that it was seeking to protect. For this reason, the case will be less of a concern to 'big brand' franchises where, even in a location where there are no existing outlets, high brand awareness could mean that the franchisor has considerable goodwill to protect even if a franchisee traded from a location for a short amount of time.
• The Court of Appeal did expressly acknowledge that a one year non-compete could be enforceable in a situation where a franchisee had been trading for longer and built up more significant goodwill in its territory. The Court suggested that the restrictive covenants could have distinguished between termination at an early stage of the agreement and terminations towards the end of the ten-year term when the goodwill to be protected was likely to be substantially more valuable. The Court also noted that there was no express discretion in the restrictive covenant for the franchisor to amend or reduce the scope of the restriction in appropriate circumstances.

Ultimately, there is a risk that franchisees will raise this case when their agreements come to an end thinking that it will release them from their own restrictive covenants without really considering the specific facts of the Dwyer case which do set it apart from many other franchisor/franchisee relationships. The case does, however, show that this is a complex and changing area and it is important to consider each restrictive covenant in the context of the specific contractual relationship rather than trying to have a 'one clause fits all' approach especially when franchisors are granting rights to new territories or building up a lesser known brand.

16 Trends and predictions

16.1 How would you describe the current franchising landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

Franchising is thriving, despite the impact of inflation and an economic downturn. The UK is still a popular international market for international franchisors from English speaking countries such as the US, Canada and Australia. The impact of Brexit on the availability of employees in the food and beverage sector is having a noticeable effect on franchises in that sector, but nothing too damaging.

Well-funded multi-unit / multi brand franchisees are a big force in the food & beverage sector. With an increasing number of larger UK franchisees this is having an interesting impact on the dynamic of franchisor / franchisee relationships.

Food & beverage, hotels and leisure, health & wellness, domiciliary care and competitive socialising are booming sectors.

We are seeing a trend for more UK based large corporate entities to move their corporate owned stores to franchisees

17 Tips and traps

17.1 What are your top tips for franchisors seeking to enter your jurisdiction and what potential sticking points would you highlight?

Whilst there are no specific franchise laws in the UK, competition and data protection regimes can be difficult for franchisors to navigate. Due to the importance of an online presence and for some franchise systems the need to collect personal data, it is vitally important that franchisors behave in a compliant manner in accordance with the relevant laws.

Footnotes

1. As at May 2023, the BFA and Natwest 2018 Survey remains the latest one. There is an upcoming update of the survey due to be published in 2024.

2. See for example Prontaprint plc v Landon Litho Ltd [1987] F.S.R. 315 and Kall Kwik Printing (UK) Ltd v Rush [1995] 3 WLUK 252

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.