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28 April 2020
In the wake of the economic turmoil caused by the COVID-19 crisis, a number of high-profile brands in the leisure and hospitality sectors have entered or will soon enter into formal insolvency processes, and more will follow over the coming months. Although failure rates among franchises are typically lower than among non-franchised businesses, franchising will not be immune to this trend.
Most franchisors or their affiliates act as suppliers of goods and services. As a franchise or distribution network grows, so does the systemic risk to the franchisor or supplier of default and failure within the network. It is therefore important that franchisors and suppliers invest in proper legal advice and legal contracts to ensure that they have the contractual rights to act quickly and effectively if the need arises.
Retention of title
Franchisors and suppliers should ensure that they have comprehensive and robust terms of supply (ideally in a separate document from the franchise agreement) which have effective retention-of-title clauses so that they can take action to recover goods in an insolvency situation. However, these terms are often overlooked.
Retention-of-title claims are a regular feature of claims made against insolvent businesses. Many suppliers of goods need to have an all-monies retention-of-title clause enabling them to recover:
It is an established principle in English law that a buyer of goods has the right to sell such goods once they are in its possession, notwithstanding the supplier having retention of title in and ownership over the goods. By selling the goods to a third party, title effectively passes, thereby negating the benefit of the retention-of-title clause. Recovering the proceeds of the sale of any goods supplied is impossible unless the supplier has obtained a legal charge over the assets of the company to the value of the goods, which is unusual in normal supply relationships.
In addition, credit insurers usually insist on their insured clients having an automatic termination of the licence to sell in the event of the buyer's insolvency.
This type of clause will give a supplier a contractual right to insist that the buyer and the insolvency practitioner stop selling its goods immediately on the practitioner's appointment. Suppliers should back this up by immediately writing a letter revoking the licence to sell and demanding an inventory showing the value of the goods held at the time of the appointment so that the value of the retention-of-title claim can be calculated as it crystallises at that point.
If the buyer continues selling the goods after receipt of such a letter, the supplier is entitled to claim the value of all goods sold following termination of the licence to sell, together with any goods retained by the buyer. This enables the full valuation of the retention-of-title claim to be pursued and hopefully payment made in full if the business carries on trading.
In most cases, the administrator will resolve the retention-of-title claim by paying the full value of the goods held once the inventory is agreed. Stock control systems are usually available to provide a printout from the retailer's IT system showing the amount of goods held and their value. This is essential in deciding whether to pursue a retention-of-title claim.
If this clause is not contained in the terms and conditions, a letter should immediately be sent to the administrator, terminating the licence to sell in any event. If no such letter is sent or there is no such clause in the terms and conditions, the value of the retention-of-title claim will diminish with each day of continued trading as the stock is depleted and sold.
It is therefore essential to terminate the licence to sell and preferably incorporate such a clause into the applicable terms and conditions to avoid these problems arising.
For further information on this topic please contact Gordon Drakes at Fieldfisher LLP by telephone (+44 20 7861 4000) or email (firstname.lastname@example.org). The Fieldfisher LLP website can be accessed at www.fieldfisher.com.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
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