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Franchisors beware - High Court finds standard terms' limitations of liability unreasonable under UCTA

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 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 (UCTA), 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 UK, views unilateral limitations and exclusions of liability in franchise agreements as only being appropriate in very 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 UCTA 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 (Saint Gobain Building Distribution Ltd (t/a International Decorative Surfaces) v Hillmead Joinery (Swindon) Ltd [2015] EWHC B7 (TCC)), the High Court has called into question the reliability of exclusion clauses in standard form business-to-business contracts by applying UCTA. Whilst 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 exclusions and limitations cannot be taken for granted and that their enforceability will ultimately be judged against the UCTA reasonableness test.

Background

The ruling followed a claim to recover the price of goods sold and delivered - admitted by the defendant - who then served a counter-claim for defective products.   The judge considered whether or not the claimant's standard terms operated to limit the claimant's liability.

Applying UCTA

UCTA 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 UCTA 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 of proof is on the party seeking to enforce the term to show that it is fair and reasonable. The court will also consider a number of 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 the particular industry.

The Decision

The claimant argued that sections of its standard terms served to protect it from counterclaims, whilst 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 a clear specification of the goods, amongst other reasons for their findings.  Ultimately however, the defendant's counterclaim failed on the basis that the court found the goods to be of a satisfactory quality.

Conclusion

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 standardized 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 need 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 and such clauses may be deemed reasonable depending on the facts. Nevertheless, franchise agreements and network supply agreements are not exempt from UCTA 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 their business.

 

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