BREXIT: no immediate contractual consequences for franchisors with English and Scottish Law contracts
Several franchisors attending the BFA annual conference on Friday - the day of the EU referendum result - expressed concerns about the implications of the UK's decision to leave the EU for their franchise agreements. We thought a very short update on this question would be useful.
1. Firstly, it's important to note that most domestic franchise agreements are governed by either the laws of England and Wales, or the laws of Scotland. There will be no immediate changes to the relevant laws and so no need to make changes to contracts. It is also inconceivable that any changes to our contract laws which govern franchise agreements will be made in the exit negotiation process, nor by the UK Government unilaterally as part of the process.
Once the UK has completed the negotiations and formalities associated with exit, which are likely to take at least 2 years during which the UK will remain a part of the EU and obliged to comply with its laws, our common law regime in the UK, which is very favourable to franchising, will be insulated from laws which may in future years be developed in the EU as part of its grand project to create pan-European laws to replace the domestic laws of its member states. These laws may go far beyond the current competition laws which remain, generally speaking, generally benign to franchisors and franchising and which are mirrored in our domestic Competition Act. That domestic legislation will continue in force unless the UK decided to repeal it.
Scotland's position may also be subject to further change should a second independence referendum take place as is being suggested may happen. Scotland would need to vote for independence before applying itself to join the EU which would also take time and accordingly there will be no speedy remedy for the Scots should they want to take steps to rejoin the EU.
So in principle there is no legal reason to change anything in franchising agreements which are governed by the laws of England and Wales, and Scotland.
2. Of course if a company has a business, commercial arrangements, or provisions in its contract which have been specifically crafted to reflect particular EU trade regulations or other laws (which would be unusual but might apply in some sectors, for example those based on technical or environmental regulations) it must consider with its advisers whether and how it may wish, or need to adapt its business system and franchise agreements to reflect the fact that such laws may cease to apply as binding obligations when the UK ceases to be obliged to comply with such laws. Such businesses which continue to trade in the EU markets are likely to have to continue to have to comply with those laws. But those with purely domestic UK businesses may not be obliged to do so in future.
3. Businesses which are particularly impacted by the immediate and future financial reactions and turbulence which can be expected over at least the next few weeks, affecting exchange rates, prices paid for products and services, potentially interest rates hikes etc., may in extreme cases need to give consideration to whether increased costs may need to be passed on or burdens shared with their networks, to giving temporary relief, or even to amending the commercial terms of the arrangement. However, all will depend on the commercial impact for particular businesses, and the prospects of recovery. Clearly for some the impact of the uncertainties will be greater than for others. Franchisors and their advisors must be particularly vigilant, monitoring the impacts for themselves and their franchisees, and discussing the position with their networks.
4. Care must be taken to adjust financial presentations and business planning where circumstances have changed, and this is particularly relevant when talking to prospective franchisees, bearing in mind the need to avoid misrepresenting the facts, and so avoiding the risk of claims, the ethical standards required by the BFA's Code of Ethical Conduct, and the impact of changes on start-up businesses.
5. As an independent legal system, going forward it will be up to the UK to decide whether to "shadow" any future franchise-specific laws which may be developed in the EU, but the UK would not in principle be subject to them, or be obliged to adopt them, without a specific sovereign decision taken by the UK to do so. The BFA will continue to monitor such developments and intervene so as to influence the development of such laws through its membership of the European Franchise Federation, as will this firm.
We will issue further updates on the implications of Brexit for particular areas of the law and business, and the British Government's position in dealing with them. In the meantime if you have any questions or particular concerns please contact us.
We are very grateful to David Kaye of Harper McLeod for his assistance in preparing this summary of the position under English and Scottish law.