Following the result of last week’s EU Referendum, Chris Wormald, partner at Fieldfisher, gives an update on the implications of Brexit on franchise agreements which are governed by English law.
1. Firstly, there will be no immediate changes to English law 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 from the EU, which are likely to take at least 2 years (and 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 any continuing 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, benign to franchisors and franchising and which are mirrored in our domestic Competition Act. That domestic legislation will continue in force unless and until the UK government decides to repeal it.
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 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 and months ahead, 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 give temporary relief, or even to amend 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 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 (in the case of domestic franchising), and the impact of changes on start-up businesses.
5. As an independent legal system, going forward it will be up to the UK government 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 government to do so. We will continue to monitor such developments and do what we can to intervene and work with industry representatives so as to influence the development of such laws.