‘No Deduction or Set‐Off’ Clauses
| Author | John N. Adams |
| Published date | 01 November 1994 |
| DOI | http://doi.org/10.1111/j.1468-2230.1994.tb01987.x |
| Date | 01 November 1994 |
The
Modem
Law
Review
[Vol.
57
‘No
Deduction
or
Set-Off‘ Clauses
John
N.
Adams”
In his note on
Stewart
Gill
Ltd
v
Horatio Myer
&
Co
Ltd,’
Edwin
Peel
observed
that this case requires those charged with the task of drafting terms and conditions
to think again about the effectiveness of clauses which purport to exclude the right
of set-off.* The recent Court of Appeal decision
in
Fastpame
Ltd
v
Lohinski3
underlines the soundness of that observation.
Fastframe
Ltd
v
Lohinski
involved a business format franchise. These usually
consist of a licence of a trade name or mark (and sometimes other intellectual
property), with the licensor/franchisor providing to the licensee/franchisee a
complete business system and management advice, and undertaking on behalf of
all the franchisees national, and sometimes local, advertising. The franchisee pays
a management services fee and advertising contribution in return for:
(1)
the right
to use the name or mark;
(2)
the business system and management advice; and
(3)
advertising services. Essentially, what the franchisor is seeking to do is to ‘clone’
his business and this entails that each franchisee enter into the same standard form
agreement with the franchisor. A common provision found in these standard forms
is that the franchisee will pay the management services fees ‘without deduction or
set-off.’ The object of this clause is, of course, to preserve the franchisor’s
cashflow in the event of it being involved in a dispute with disgruntled franchisees
(and even well-managed franchise networks tend to have a few of the~e).~
Unfortunately, it also puts a powerful weapon into the hands of a franchisor
company which is not carrying out its side of the bargain.
The recession has given rise to a lot of litigation between franchisors and
franchisees. A common situation is that as the franchisor’s financial position
deteriorates it ceases to provide any management or advertising services to its
franchisees. Not surprisingly, the franchisees stop paying the management
services fees and advertising contribution. The franchisor duly issues an
0
14
writ
and the franchisee resists summary judgment on the basis of a Defence and
Counterclaim based on the franchisor’s breaches.s The franchisor will seek
to
argue that, whatever the merits of the franchisee’s claim, it is entitled to summary
judgment because of the ‘no deduction or set-off clause.6
The question addressed in
Fastframe
Ltd
v
Lohinski
was whether or not UCTA
bites in such a situation to prevent the franchisor relying on the clause. Apart from
anything else, Schedule
1
paragraph
1
of UCTA provides:
Sections
2
to
4
of this Act do not extend to:
(c) any contract
so
far as
it
relates to the
creation or trun.$er [emphasis supplied]
of
a
right
or
interest in any patent, trade mark, copyright
[or
design right], registered design,
*Professor of Intellectual Property, University of Sheffield; Director, Common Law Institute
of
Intellectual
Property, London.
1
2
3
4
5
6
119921 2 All ER 257.
(1993)
56
MLR
98,
103.
Court
of
Appeal,
3
March 1993 (unreported).
See
Adams and Prichard Jones,
Franchising
(London: Buttenvorths, 3rd ed. 1990)
p
340.
The amount of the Counterclaim must, of course, exceed the sum claimed under the
0
14
writ.
Of course, if the problems have arisen because the franchisor is in financial difficulties, the franchisee
is unlikely ever
to
recover
on
the Counterclaim.
960
0
The Modern Law Review
Limited
1994
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