Franchise Disputes: Exclusion, Limitation and Basis Clauses – The Requirement of Reasonableness
Before entering into a franchise agreement, legal advice should always be obtained. They are by their nature complex contractual documents. It is common practice for franchisors to include in franchise agreements a clause that seeks to exclude or limit (or which has such effect) liability.
There are two overarching types of clause in franchise agreements in this context. They are (a) expressly seek to exclude or limit liability (so called, exclusion or limitation of liability clauses), or (b) clauses which have purport to set out an agreed factual premise for the agreement, and which are intended to have the effect of excluding or limiting liability (so called basis clauses).
THE REQUIREMENT FOR REASONABLENESS
Until 2018, it was thought that there was a difference between exclusion/limitation clauses and basis clauses insofar as controls on such attempts by franchisors to restrict liability was concerned. However, the Court of Appeal clarified in First Tower Trustees Ltd and Others -v- CDS (Superstores International) Ltd  EWCA Civ 1396, that there is no difference at all. This means that all such clauses will be subject to the requirement of them being reasonable, in order to be enforceable, a requirement which stems from the Unfair Contract Terms Act 1977 (“the 1977 Act”).
Section 3, states:
“3(1) This section applies as between contracting parties where one of them deals on the other’s written standard terms of business.
(2) As against the party, the other cannot by reference to any contract term:
- When himself in breach of contract, exclude or restrict any liability of his in respect of the breach; or
- Claim to be entitled:-
- to render a contractual performance substantially difference from that which was reasonably expected of him, or
- in respect of the whole or any part of his contractual obligation, to render no performance at all,
except in so far as (in any of the cases mentioned above in this subsection) the contract term satisfies the requirement of reasonableness.”
Most franchise agreements are standard form. They are often presented on a “take it or leave it” basis to the prospective franchisee. Hence, in any franchise dispute which raises this issue, the 1977 Act must be considered.
The onus will often be on the franchisor, as the person relying on the clause, to show that it has legal effect because it is reasonable.
The parties to a franchise dispute would need to consider what is reasonable? Section 11 of the 1977 Act requires that:
“11(1) …the term shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made”.
Schedule 11 provides some guidelines as to what a court might consider when assessing reasonableness of such clauses in a franchise agreement. Those factors are:
“(a) the strength of the bargaining positions of the parties relative to each other, taking into account (among other things) alternative means by which the customer’s requirements could have been met;
(b) whether the customer received an inducement to agree to the term, or in accepting it had an opportunity of entering into a similar contract with other persons, but without having a similar term;
(c) whether the customer knew or ought reasonably to have known of the existence and the extent of the term (having regard, among other things, to any custom of the trade and any previous course of dealing between the parties);
(d) where the term excludes or restricts any relevant liability if some condition was not complied with, whether it was reasonable at the time of the contract to expect that compliance with that condition would be practicable;
(e) whether the goods were manufactured, processed or adapted to the special order of the customer.”
Where a clause is a limitation of financial liability, the court will also consider (a) the resources which a party could expect to be available to it for meeting any liability and (b) how far it was open to him to cover himself by insurance.
Any exclusion clause in a franchise agreement that is disputed will face the application of the reasonableness test, and for that reason, the wording and composition of this clause is paramount, as are the reasons for the franchisor seeking to justify its inclusion. Every case turns on its own facts, but an important factor potentially be the existence of legal representation for the franchisee.
Potential areas of challenge
Each case will turn on its own merits. Fundamentally, the question to ask if whether by some contract term, the franchisor is seeking to avoid or limit liability. If so, then it may well be caught by s.3 of the 1977 Act. Some areas in which such arguments might be raises would be:
- clauses that permit substitution of products of services by the franchisor;
- clauses that seek to change the levels of fees payable to a franchisor; and
- clauses that seek to permit the franchisor to provide no, or limited support, in certain circumstances.