February 2, 2012

Ban on Automatically Renewable Contracts

Automatically renewable contracts (ARCs) are contracts which, at the end of a minimum contract period (MCP), roll forward to a new MCP by default unless the customer informs their provider that they do not wish this to happen.

Ofcom has decided that the sale of new ACRs will be prohibited for residential customers and small businesses (businesses with no more than ten employees) for telephone and broadband services from 31 December 2011, and that ACRs are to be removed from the market by 31 December 2012. Ofcom considers such contracts to be damaging to consumers and competition in communications markets.

Customers will now have to make an active opt-in decision at the end of each MCP if they wanted to renew their contract.

Businesses using automatically renewable contracts should review their policies and put provisions in place which allow for their customers to “opt-in” to continue with the contract for another period.

September 30, 2011

Minimum terms and early termination charges in consumer contracts – Are they fair?

The High Court has ruled that certain terms in gym contracts were unfair and contravened the Unfair Terms in Consumer Contracts Regulations 1999. In particular terms that imposed a minimum membership period and early termination charges were designed to entrap the average gym user.

In the case of Office of Fair Trading v Ashbourne Management Services Ltd and others their gym memberships were for a fixed term of one to three years and if the contract was terminated before the fixed term then the full membership fee had to be paid straight away. These terms were held to create an imbalance between the consumer and the gym and as such were unfair.

In light of this decision business owners should review the terms of any standard contract that they enter into with consumers. Any minimum term imposed should not be excessive. If there is an automatic renewal term there must be a clear exit procedure for the consumer and if they impose early termination fees there must be a suitable discount for early payment.

August 15, 2011

Does your franchise agreement sufficiently protect your reputation?

The decision in MMP Gmbh v Antal International Network Ltd raises important considerations when parties enter into a franchise agreement. The case was brought after Antal terminated their franchise agreement with MMP with immediate effect after receiving a complaint that one of MMP’s employees had used personal data obtained during the course of her employment to harass a client.  Their reason for termination was that there was a breach of one of the substantial terms of the franchise agreement and the employee’s actions could adversely affect Antal’s name, trade marks or other intellectual property.

It was decided that the actions of the employee were attributable to the franchisee and as such there could be a breach of the clause.  However, Antal were not entitled to terminate the agreement due to the construction of the clause they relied upon, which required there to be evidence of an actual adverse affect rather than there just being a potential to affect.  Antal could not provide any evidence that their name had actually been adversely affected as a result of the employee’s actions.

Franchisors should review their agreements to ensure that they are drafted in a way that allows them to terminate the agreement immediately if their brand and reputation are jeopardised.

Franchisees should also be aware that the actions of their employees could be attributed to their business even if they are outside business hours and off of the premises. Franchisees should ensure they have sufficient procedures in place to minimise their risk of losing their franchise due to the misconduct of their employees.

Directors duties

Becoming a director can reduce your income tax bill via the ‘salary/dividend’ method. However, what many owner-directors might not appreciate is that the role requires them to undertake specific legal duties; the penalties for non-compliance can be severe to include possible criminal proceedings. The Companies Act 2006 ‘codified’ the duties owned by directors which include promoting the success of the company, exercising reasonable care, skill and diligence, and avoiding conflicts of interest.

There are laws that give right of prosecution against directors in their personal capacity for certain actions undertaken whilst fulfilling that role, for example a director who fails to prepare and deliver documents, on behalf of the company, to Companies House as and when required by the Companies Act can result in a criminal record for the director and a level 5 fine of £5,000.

Directors should be aware of the statutory duties they owe to a Company and should consider if they are being remunerated enough for the personal risk that they are exposed to by taking on this role. Director’s insurance should be obtained to cover the costs of claims and proceedings against them. The cost can usually be funded by the company.