a recent High Court case has shone the spotlight on misrepresentation in franchising and the options open to franchisees who believe they have been mis-sold their franchise dream.
In the case of Ali v Abbeyfield VE Limited (2018) four Vision Express franchisees were successful in their claim against the franchisor for fraudulent misrepresentation. They claimed that they had been induced to enter into their franchise agreements as a result of the following misrepresentations:
- the likely performance of the stores;
- the average performance of Vision Express’s new stores;
- the number of daily eye tests that they could expect to carry out;
- the conversion of those eye tests into sales of glasses; and
- the time it would take to repay an overdraft facility provided by the franchisor to assist with start-up costs and become profitable.
The High Court ruled that the above representations had indeed been made, that they were all false and that the franchisor (through its employees), either knew they were false or was reckless as to whether they were true. The claimants were therefore able to claim their losses arising from the franchise agreements.
But can’t the franchisor exclude its liability for misrepresentation?
Many franchise agreements contain a clause seeking to exclude the franchisor’s liability for any statement or representation made that is not set out in the franchise agreement, or annexed to it. I therefore always advise my franchisee clients that if they have been told anything which has induced them into entering into the franchise agreement, they should get it set out in writing and annexed to the Agreement, otherwise it could be difficult to subsequently claim that they have been mislead.
The Court in the Ali case however, found such clause on the facts of the case to be unreasonable for the purposes of section 3(1) of the Misrepresentation Act 1967 and therefore it could not be relied upon by Vision Express. Relevant factors when determining this were, the unequal bargaining power of the parties and the fact that the claimants did not, nor were advised to, take legal advice on the franchise agreement. The court also commented that despite such a clause being typical in franchise agreements it was not common in practice to annex representations made by the franchisor to the franchisee to the final, signed agreement.
Advice for franchisors
Whilst it remains important to seek to minimise your liability for pre-contractual representations made to franchisees with appropriate clauses in your franchise agreement, these cannot be relied upon as being bullet proof.
More importantly the case highlights the importance of scrutinising the accuracy and relevance of information you provide to your prospective franchisees and ensure that your employees are trained to stay on message. Any false, inflated or misleading financial information (or indeed any other material information relating to the franchise) will leave you with exposure for a misrepresentation claim. Franchisees should be advised to take their own independent legal advice on the franchise agreement and in particular, any limitations or exclusions of the franchisor’s liability should be sufficiently drawn to their attention.
Advice for franchisees
Do your due diligence! Question information provided by the franchisor and undertake your own research. Take legal advice on the contents of the franchise agreement. They are often long and legalistic documents so it is important you fully understand the possible implications of the clauses you are signing up to. A claim for misrepresentation is a last resort – you want to flush out any issues before you sign the franchise agreement, go into business with the right franchisor and be a success!