The legalities of franchising your business in Scotland

By Andrew Fraser, Harper Macleod

Unlike many of its European neighbours or friends across the Atlantic, Scotland’s franchising industry is very loosely regulated. There is no specific franchising legislation which requires, for example, the registration of Franchise Agreements with a governmental agency or the provision of ‘Disclosure Documents’ to potential franchisees. Instead, the legal framework of Franchising in Scotland is drawn together from a variety of sources:

• General commercial law (for example, the Law of Contract, Property or Intellectual Property);
• Specific Acts of the UK or Scottish Parliaments (for example the Data Protection Act 1998 or the Anti-Bribery Act 2010).
• European Law – particularly ‘competition’ rules which emanate from Europe (e.g. restrictions on price fixing and distance selling regulations).
• The Scottish Courts - from time to time cases involving franchise systems are brought to the courts in Scotland. The decisions in these cases shape the legal framework of franchising in Scotland
• The English and Welsh Courts – judgements in franchising cases from south of the border are not binding in Scotland. However these decisions will influence any judge considering similar matters in Scotland and, as such, help to impact best practice in franchising.
• The European Code of Ethics for Franchising (as implemented by the British Franchise Association’s Code of Ethical Conduct) – Although this Code has no legal force (in the sense that a Franchisee cannot sue a Franchisor for breaching the Code), it has been recognised by an English Court as providing “a good indication of what is to be regarded as fair practice in the industry”.
• British Franchise Association (BFA) – The BFA issue regular notes on best practice and ethical conduct. Again, these are not legally binding on franchise systems, however they do contribute to the legal framework.

As you can see there are a wide range of sources which impact the law surrounding franchising in Scotland. However, in terms of the practical legal requirements of franchising your business, some of the key legal considerations are:

Protection - The first step towards franchising your business is protecting it. This includes protecting both your Brand (through a registered Trade Mark) and your Knowledge. In franchising you are giving someone else the right to use your confidential information and years of experience and know-how. As such you need to ensure that this information is protected as far as possible from competitors or potential competitors. The majority of legal protections will be set out in the Franchise Agreement. However, not every applicant for a franchise makes it to this stage, as such you should ensure that all potential franchisees sign up to Confidentiality Agreements before you disclose any knowledge that could potentially help a competitor.

Structure – The structure of a franchise system is important to get right from the outset as it can be difficult to alter at a later date when you have active franchisees. We would always recommend prospective franchisors consult with a bfa accredited solicitor to help avoid the common structuring pitfalls. Some examples of these include: creating a franchise system which breaches Competition regulations; inadvertently operating an illegal pyramid scheme; and accidentally creating an “agency” relationship rather than a Franchise network.

Franchise Agreement – This is the main contract between the Franchisor and the Franchisee which sets out the full relationship between the parties. It is usually a lengthy document addressing some of the following key issues:

• The rights being granted to the Franchisee
• The respective obligations of the Franchisor and Franchisee
• The Franchisee’s right to renew the agreement
• The Franchisee’s right to sell on their franchise
• The initial and ongoing fees and royalties to be paid
• The training to be provided by the Franchisor
• The termination of the agreement
• The restrictions on the franchisee following termination
• Any property considerations that may be required - the law of property in Scotland is very different to English property law and particular attention should be paid to these provisions to ensure that they are enforceable in the relevant territory.

Manual – Although not strictly a legal document, the Operations Manual will certainly have legal implications. For example, do the processes and operating methods set out by the Franchisor in the Manual meet any required Health and Safety implications? Are your standard customer terms and conditions (documented in the Manual) compliant with the latest developments in consumer protection legislation? As a Franchisor you will be responsible for updating the Manual whenever required to reflect any changes in the law.

Recruitment – When recruiting franchisees, you should also be aware of the potential legal implications. In particular, you should ensure that you do not misrepresent any facts or figures which might encourage a franchisee to invest in your franchise opportunity. Any figures provided, such as financial projections, should always be verifiable and you should fully inform the potential franchisee how the figures have been calculated.

This article is designed as a quick introduction to the legalities of franchising your business in Scotland. As you have no doubt worked out, franchising can be tricky to get right, this is why we would always recommend speaking to a BFA accredited solicitor to help guide you through.

Andrew Fraser
Andrew is a solicitor who acts on behalf of franchisors and franchisees throughout the UK on all manner of franchising issues including franchising businesses, buying and selling franchised businesses and managing franchise disputes.

Prior to joining Harper Macleod, Andrew was a Franchise Consultant helping businesses to grow through franchising; existing franchisors to improve and expand their networks; and working with large retailers to franchise internationally. He has worked with a wide range of clients from sole traders to global companies, such as Ralph Lauren, Esprit and American Eagle Outfitters.

To contact Andrew email Andrew.Fraser@harpermacleod.co.uk