FAQs

A construction contract is an agreement with a person to carry out or arrange for carrying out of construction operations. Construction contracts can also include agreements to do architectural, design or surveying works and agreements to provide consultancy in construction related fields.

To increase efficiency in the construction industry there are standard forms of contract, published by bodies such as the Joint Contracts Tribunal (JCT), Institute of Civil Engineers (NEC), Institution of Chemical Engineers (IChemE), Institution of Electrical Engineers (MF/1), International Federation of Consulting Engineers (FIDIC) . 

JCT contracts are generally made between an employer and a contractor with the aim of facilitating the process of delivering a building project. They are the most popular form of contract on private building projects.  

The NEC contract suite provides a focus on good project management, cooperation and communication. NEC contracts are intended to be used for all types of projects, notwithstanding the discipline or size of the project and encourage a collaborative approach between the parties. 

The MF/1 form of contract is designed for the supply and erection of electrical or mechanical plants. 

The IChemE model form conditions of contract are intended for the construction of process plants. IChemE is used for water treatments projects, petrochemical installations and power plants, as its detailed provisions for testing on completion makes it especially fitting for schemes for process plants. 

The FIDIC suite of construction contracts, includes several types of FIDIC contract such as the Red Book (building and engineering works designed by the employer), the Yellow Book (mechanical and electrical, building and engineering works designed by the contractor), the Silver Book (engineering, procurement and construction and turnkey), and the Green Book. FIDIC contracts are used on many international projects. 

Ordinarily, a construction contract will specify a completion date by which completion of the works must be achieved. However, it is common for events to occur which delay the progress of the works and affect the critical path. 

Examples of such delay events include exceptionally adverse weather, delay caused by statutory undertakers, delay caused by a Local Authority, any act of prevention or interference by the employer or force majeure.

If delays mean that the works are not completed by the completion date and the contractor is not entitled to an extension of time, the contractor will ordinarily be liable to pay liquated damages to the employer for the period from the agreed completion date until the works are completed.

It is important to note that a contractor has no statutory or common law entitlement to an extension of time.  Any entitlement is dependent on the specific relevant contractual provisions. All of the standard forms of construction contract include provisions for an extension of time, on specified grounds. 

A contractor will seek an extension of time under the construction contract to allow the contractor to complete the works within a set period after the original contractual completion date, avoiding liability to pay the employer liquidated damages (or general damages for delay). Depending on the wording of the contract the extension of time will normally start from the completion date, rather than from when the delay event occurred.

Should an extension of time be granted, common practice is to push back the completion date to a later date. As a result, the contractor will only be liable for liquidated damages if the works are not completed by the amended completion date.

If the contract provides for sectional completion an extension of time might also be granted for the date for completion of a section of the works. 

Contractors need to be aware what notice provisions need to be complied with under the contract is order to request and be granted an extension of time. This can include an obligation to notify the employer within a certain period of time from the occurrence of the event in question.  In addition, the employer may need to issue certain notices in order to be able to recover liquidated damages for late completion. 

If the delay to completion of the works is caused by an act or omission by or on behalf of the employer, the “prevention principle” can mean that the employer will not benefit (for example receive liquidated damages) as a result.  In these circumstances, if the contract does not allow for an extension of time for the contractor, then time can be said to be “at large” and the contractor will have an obligation to complete the works within a ‘reasonable time’ rather than by any set completion date and any liquated damages provisions may fall away. It can therefore be for the benefit of the employer, as well as the contractor, to include provisions that deal with the extension of time when the contractor is delayed due to the employer’s default.

Part II of the Housing Grants, Construction and Regeneration Act 1996, often referred to as the ‘Construction Act’, contains provisions that are implied into all relevant construction contracts.

Part II of the Construction Act provides that construction contracts must include:

• a right for a party to a Construction Contract to refer a dispute to adjudication for determination of a dispute (sections 108 and 108A); and
• a mechanism for periodic payments during the course of the works (sections 109 to 113).

The Construction Act is supported by The Scheme for Construction Contracts (England and Wales) Regulations 1998, which sets out implied terms relating to payment and adjudication. The implied terms are to be read into a construction contract if the actual contractual provisions do not meet the requirements of the Construct Act.

Mechanism for Adjudication

Under Section 108 of the Construction Act, a party to a construction contract has the right to refer a dispute arising under the contract for adjudication under a procedure complying with s.108. The adjudication terms of the Scheme would be implied into a construction contract where they are not expressly included.

Further, if a construction contract has provisions that are not compliant with the Construction Act, the Scheme’s adjudication mechanism will be implied into the contract. In this circumstance, the whole of the contract’s mechanism is replaced with the Scheme’s adjudication mechanism.

This provides every party to a relevant construction contract with access to a process providing a (temporarily) binding decision within 28 days of referral to an adjudicator.

Mechanism for Payments

Sections 109 to 113 of the Construction Act sets out the provisions that construction contracts must deal with:

• an entitlement to payment by instalments, stage payments or other periodic payments (s.109);
• an adequate mechanism for determining what payments become due under the contract, and when, along with a final date for payment for any sums which become due (s.110);
• payment notices (s.110A and a.110B);
• pay less notices (s.111); and
• a right to suspend for non-payment of a sum that is due (s.112).

Section 113 of the Construction Act also prohibits ‘pay when paid’ provisions that attempt to make payment under a construction contract conditional on the payer receiving payment from a third party.

The Scheme contains a catch-all set of provisions for when a construction contract does not have any clear payment terms. In this circumstance, all the payment provisions in the Scheme will be implied into the construction contract. However, if a construction contract does contain payment provisions but these provisions do not comply with the Construction Act, the Scheme’s payment provisions will be implied only to the extent necessary to rectify any non-compliance.

Following the implementation of the Construction Act there has been a substantial amount of case law that has developed around the question of compliant payment terms in a construction contract. Legal advice on the interpretation and compliance of payment terms in a construction contract is essential.

Whether you are a franchisee or a franchisor, starting to franchise is an important undertaking. As a franchisor, you will be investing significant amounts in establishing a framework and building your network. As a franchisee you are making an investment probably using your savings to fund that initial investment. Getting the right legal advice from the outset, is essential.

You wouldn’t buy a car without doing an HPI check, you wouldn’t buy a house without doing searches, so why buy a franchise without getting legal advice? Just as you wouldn’t want a dentist performing a heart operation, or a mathematics teacher giving you investment advice, the same way you should not get a franchise agreement off the internet or use a non-franchise lawyer for advice.

It may sound odd coming from a lawyer, but litigation should always be the last resort. It is expensive, time consuming and the result can never be guaranteed. Whether you are tempted to “teach them a lesson” or “set an example”; before you instruct the lawyers, make sure that your own house is in order. When it comes to litigation, the best form of defence is attack so make sure that if you decide to sue someone you don’t end up on the receiving end of a claim! Hard to believe but this does happen – a franchisor who sued a franchisee for unpaid franchise fee, ended up having to defend its own position and not only lost but then had to pay damages to the franchisee!

Don’t delay action – the longer you leave it, the problem is only likely to get worse and not better. Act promptly and make sure that everything is documented and followed up. Can the issue be resolved by putting additional support or training in place?

Taking emotions out is tough but consider your objective – if your objective is to find a resolution, even if that resolution is for the franchisee to exit the network, you are unlikely to get what you want if the language is accusatory and inflammatory. Focus on the objective and what would be most helpful or useful to achieve your objective. Remain open to a compromise – if by compromising you still achieve your objective, then that is still a positive outcome.

Consider enlisting help of an independent 3rd party. There are many professionals who can help facilitate a conversation. We often describe them as mediators. Mediation doesn’t necessarily have to be very formal but it can do wonders! If the franchisor is a member of the British Franchise Association (the BFA), then you may wish to consider engaging with the BFA dispute resolution process.

The first place to start is your franchise agreement since this ought to contain the process and conditions that you will be expected to satisfy. At this point it would also be worth speaking to your franchisor to find out if they have a process they’d need you to follow – most established franchisors not only have a process in place but will also insist that you use their standard documentation which should save you time, money and hassle!

A successful exit is something that you need to plan for so there will be several stages to the sale process, namely:

• Preparation stage – this is the initial stage of planning, getting “your house in order”, making sure that your business is in the best position possible for a sale. Remember – your business will be valued depending not only on your revenue or turnover but also on how compliant it is with the franchisor’s system, with any external regulator (if applicable), whether you have the right staff in place. So, in order for you to achieve the best possible price, your business must be in the best possible shape and stay in that shape!
• Valuation and getting ready to sell – this is the stage where your business actually goes on the market!
• Finding the buyer – this may take time depending on the price you are looking to achieve. The higher the price the smaller is your pool of potential buyers. And don’t forget – they also need to want to buy a franchise and be approved by the franchisor.
• The legal process – once the buyer is found, this is when the legal process will commence. How long this takes will also be determined by whether or not the buyer is seeking external finance. A big part of this last step is due diligence. This is the part of the process where the buyer’s solicitor will be raising enquiries and the buyer will essentially (whether itself or using its advisors) will want to investigate and check out the state of your business. The more prepared you are for this, the quicker this stage can be completed. This requires you to be organised and to have documents in place ready to be reviewed.

The franchise agreement will set out what fees are payable by you to the franchisor on a sale – this usually will include a fee for approving the buyer, a commission if the buyer was introduced by the franchisor and a contribution towards the franchisor’s legal costs. You should factor these in when setting the sale price and budgeting for costs. In addition to these fees, there will also be your accountants’ fees, solicitors’ fees and the sale broker’s commission.

Selling a business does not happen overnight and what you get out is very much what you put in so start planning for the exit in good time to ensure that it is the exit that you want!

What is better will depend on your objectives and your skills. For some, starting from scratch may be better because they enjoy the buzz of building something completely new. For others, taking over an existing business will be just the challenge they need. If you are looking at options and considering whether to buy a resale or not, consider the following:

• Location – How important is location to you? Are you prepared to relocate? How far are you prepared to commute? Does this fit in with the particular franchise sector you have chosen? The more established the brand the less choice you will have when it comes to immediately available territories. If that is the case, it will be particularly important to ensure that the franchisor is aware of your preference for location but also that you keep the franchisor updated in case your circumstances change.
• Timescales – Are you looking to invest immediately or the next 12 months or are you flexible? Regardless of the sector and the brand, when you buy a franchise, you will need to complete an initial training course. Most franchisors have set times when they run such training courses, but some may be more flexible than others. Regardless of whether you are buying a cold start or an existing franchised business, you will need to take the franchisor’s training schedule into account, but this is particularly important to consider in a resale situation. When considering timescales, you need to consider not only your time, the franchisor’s and the bank’s, but if you are looking at purchasing an existing business you will also need to consider the seller, your solicitor, their solicitor, your accountant, their accountant, if there is a property involved then potentially the landlord and any other third party who may be involved.
• Due diligence – When buying a resale, there will be additional due diligence that you will need to do including financial, legal and operational due diligence. You will therefore need to allow for time, resource and the cost of such due diligence.
• Skills – Starting from scratch allows you to learn the business as you go along, recruit your own team and grown together. In a resale, you are walking into a business you are nor familiar with, in an industry you may be not familiar with and an existing team with whom you have no history.
• Investment – Although on average buying a resale is likely to be more expensive this is not always the case, and it is important to consider the exact breakdown of what the costs and expenses look like.

Renewal conditions and process should be covered within the franchise agreement. Most franchisors require their franchisees to serve a notice confirming that they wish to renew. This is standard practice because, of course, if a franchisee does not want to renew then a different process will need to be put into place to deal with the wind down and closure of the business (unless the franchisee opts to sell instead!).

Renewal is usually conditional upon (a) franchisee’s compliance with the franchise agreement, the manual and generally the system, (b) franchisee being up to date with any fees due to the franchisor, (c) franchisee’s performance being in line with expectations or business plan. If the business is premises or vehicle based there would usually also be a condition requiring for the premises to be refurbished and updated or vehicles being updated or being in a certain condition. It is also common to see a requirement to attend additional training and the franchisor would typically expect payment of a fee to cover its costs of dealing with renewal.

Upon renewal, the franchisor would typically issue to the franchisee a new franchise agreement which may or may not be the same as what the franchisee had signed previously. It is therefore always advisable to obtain legal advice on the renewal franchise agreement just to make sure that you do know what to expect.
A renewal is an opportunity to pause, reflect and make a plan. It is an opportunity to consider and review an exit plan, to check in against your plan and adjust if necessary. Is your exit plan to sell in 5 years or 10 years? What price do you want to achieve and what do you need to have in place to achieve it? What support do you need from the franchisor?

For a franchisor, a renewal is a chance to check in with the franchisee – to celebrate their achievements, to review support structure, to influence the future trajectory. If the franchisee is a great performer, renewal is the time to discuss future plans. Could this franchisee be your next multi-unit franchisee? If the franchise has plateaued, what are the causes and what can you do to help your franchisee get to the next level or is this indeed the right time to start having a conversation about exit and how you can help your franchisee achieve this in the right way.

Any franchise agreement should as a minimum cover the following:

a) The rights granted – are you being granted an exclusive or non-exclusive right, what are conditions attaching to the rights granted?
b) Duration – how long is the term of the agreement?
c) Fees – the franchise agreement should set out what fees are payable, when and how. It should also set out whether the fees can be changed and if so, how.
d) Initial Obligations – the agreement should set out the initial obligations of both parties. This usually covers what a franchisee must do in order to start trading (whether there are any registrations which need to be obtained, premises etc) and what the franchisor will provide (usually training and support).
e) Franchisor’s Obligations – there should be a clause which sets out what the franchisor will be required to provide during the term of the franchise agreement.
f) Franchisee’s Obligations – this is usually the most detailed clause because this will set out what the franchisee must and must not do.
g) Renewal – there should be a clause dealing with renewal of the franchise term. This would typically set out the process that needs to be followed and any conditions and fees which would apply.
h) Sale of Business – there should be a clause covering the process and requirements which will apply if the franchisee wanted to sell the business.
i) Death and Incapacity – this clause should cover what would happen in the event of the individual’s death or incapacity.
j) Termination and Post Termination Obligations – this clause would typically cover the circumstances in which the franchisor has the right to terminate the franchise agreement and this clause is very important. The agreement would then usually contain a clause that would summarise the obligations of the parties once the agreement has been terminated.
k) Restrictions – whether a stand alone clause or not but you can certainly expect a clause that would set out a restriction on the franchisee’s ability to be involved in a similar or competing business both during the term of the franchise agreement and after its termination.

In addition to the above, there should also be clauses dealing with marketing, employees, insurance, records and reporting, inspections and audits, data protection, if the business is premises based provisions relating to premises, if the business requires vehicles clauses setting out requirements applicable to vehicles, dispute resolution and indemnities in favour of the franchisor.

The purpose of getting legal advice before signing a franchise agreement is not to negotiate or re-negotiate the terms of the franchise agreement but to ensure that you understand your rights and obligations which will be set out in the franchise agreement and any restrictions which will apply to you.

A franchise agreement is also a reflection of the franchisor – if the agreement is badly drafted and contains spelling and grammatical errors that should be a warning to any prospective franchisee. If, on the other hand, the agreement is simple to follow with understandable language and it follows the industry standards then this is more likely to support the conclusion that the franchisor has done their research, made an effort and invested in being a franchisor.

A franchise agreement will be drafted to protect the interests of the franchisor, since the franchisor has invested in developing the brand and the business system. But as with all things, it is important to ensure that you know what to expect, that you are clear on what fees you may be expected to pay, what you can expect from your franchisor and what the franchisor will expect from you. Just like when you buy a house you may want to obtain a survey or if you were looking to purchase a car, you would want to check previous MOTs or check there is no outstanding finance – not to change what you are buying but to ensure that your expectations match the reality. The same principle applies to franchising – the purpose of a franchise agreement review is to provide you with a summary of what you will be expected to do, what you can expect from the franchisor and any restrictions which may apply to you.

If you are new to franchising you may not know what is standard or not standard within the franchise industry and the purpose of obtaining legal advice is to find out exactly that – are the obligations that you are about to accept standard or are they in any way onerous or unusual.

Ultimately, you are about to invest a not insignificant amount of money and to sign up for a period of time – usually at least 5 years, so it is important to understand what is expected of you and what you can and cannot do.

For the reasons set out above, it is important that when you do obtain legal advice, you do so from a solicitor experienced in franchising.

You should expect to follow a system. The point of buying a franchise is that you do not need to reinvent the wheel. Someone else has already established a business and has proven that it works and can be successful if you run it in a particular way. This means following instructions of the franchisor. This does not mean that success is guaranteed – this is not the case. Success will be dependent on the effort you put in and your ability to follow the manual. In addition, you will be expected to pay a fee and to sign a franchise agreement which will contain restrictions on what you can and cannot do. When you buy a franchise, you are essentially paying for the benefit of “renting” a business system for a period of time. Although it will be your business, it will be your business for a specified period of time only. Once this period expires, you will typically have the option either to carry on (subject to conditions) or to exit. When you exit, you should expect, to be subject to certain restrictions – usually, you would not be able to continue in there same or competing business for at least 12 months.

The franchisor is likely to ask you to sign a confidentiality agreement or a deposit agreement. This is standard since the franchisor is unlikely to start sharing any information with you unless they know that (a) you are serious about the opportunity and (b) you will keep the information confidential and not misuse it.

The franchisor may ask you to pay a deposit. Again, this is standard because the franchisor would not want to reserve a territory and grant you exclusivity without the security of a deposit. The deposit should be refundable although the franchisor is typically entitled to deduct any costs that they may have incurred in the event that you withdraw.

Finally, you can expect to be issued with the franchisor’s standard franchise agreement to enable you to obtain legal advice. Additional point to note, is that even if you intent to operate your franchised business through a limited company, the franchisor is likely to ask you for a personal guarantee and this is entirely standard and because your limited company is a separate legal entity. The purpose of the guarantee is two-fold – (1) to guarantee that your limited company performs its obligations and (2) to guarantee payments.

First thing to note is that you cannot franchise an idea; you must have a business which is proven to be successful. Before you can embark on a full scale franchise operation, you should first test that your business is indeed franchisable and the best way to do this is to run a “pilot”. Running a pilot involves putting together a manual on how to operate your business and then essentially getting a third party to follow those instructions.

If you haven’t already protected your brand, you should look into registering your name, logo and any other intellectual property that you have developed. It is essential to undertake proper research, to ensure that the name you have chosen is actually available. If you choose a name that someone else is already using then not only can that potentially make it harder for you in the future from competition and marketing perspective but there may also be a risk that if that other business was using the name for longer. If this is the case, they could take action against you, and if they are successful, you would have to change your name. Trade mark protection is limited in geographic scope so if expanding overseas you will need to ensure that your trade mark is registered in your target country and if, relevant, the translation works in the local language. Don’t forget about domain names! Like it or not but we live in an online world. Telephone numbers are no longer as essential as they once were. What’s far more essential is having an online presence. Make sure you have purchased all relevant domain names and reserved the social media handles.

You will also need to consider how you train your franchisees; you will need a franchise agreement and you will need to have thought about what your franchise territories will look like.

Becoming a franchisor requires finance – this may be obvious but starting to franchise is an investment and whilst franchising can be a very profitable way to expand, you will need to invest before you will start to see a return. Get quotes and be realistic about the available finance you have or what you can raise and don’t fall into the trap of thinking you can do this on the cheap – those who have tried will tell you that you’ll end up spending much more in the end if you don’t do it right from the beginning!

In addition to the operations manual, another key document that you will need is the franchise agreement – this will be the main contractual document between you and your franchisees. It is important to get it right. There may be some other documents to consider too – like a confidentiality agreement or a deposit agreement.

Franchising is where one party – a franchisor – grants another party – the franchisee – a licence, for a specified period of time, to operate a business that the franchisor has established using the name and brand of the franchisor subject to the franchisor’s quality control measures in return for a fee. Franchisor must have established a business which has been proven to be successful and franchising is a way for the franchisor to expand without using its own cash and employing staff directly. For a franchisee, it is an opportunity to run their own business but instead of starting from scratch, the franchisee has a business model that they can follow with support from the franchisor.

Franchising is essentially an opportunity for the franchisee to rent the franchisor’s business model for a limited period of time within a specified territory. It is true that franchisees are their own bosses but they must operate within the parameters of the business model and they will be subject to restrictions both during as well as after exiting the franchise relationship.

A prospective franchisor will need to ensure that they have taken appropriate advice and have taken all relevant steps to protect their intellectual property rights, such as obtaining a registered trademark.
A franchisor will also need a franchise or operations manual. This is a core element of the franchise business and is essentially a step by step guide which somebody who has never worked within your business can follow and replicate what you do. However, an operations manual alone will not be enough and, as a minimum, most franchisors have some sort of initial training programme as well as additional training which will be delivered throughout the life of a franchise.

Franchisees will expect a level of ongoing support and a franchisor needs to be in a position to meet this expectation. Although it is for the franchisor to set the expectation in the first place, the franchisor will then need to have the infrastructure to deliver on it.

The biggest difference between licensing and franchising is that in franchising franchisees are subject to quality control measures. This means that the franchisor must be clear on what these are, how franchisees will be assessed and then actually enforce system standards.

Franchising is about building relationships and any franchisor’s success will be largely down to choosing the right people as franchisees. For a prospective franchisee, investing in a franchise means that they are buying into an existing brand and a business which has been proven to be successful.