Including inaccurate or intentionally misleading details in a franchise agreement can prove to be a costly mistake indeed
When thinking of franchises fighting legal battles, one is more likely to think of coffee cups and Golden Arches than fraudulent claims made on franchise agreements. Nonetheless, cases of misrepresentation in franchise agreements can result in significant legal costs for all involved. For this reason, it’s vital to know how to bring about a happy resolution for all involved – preferably before the case hits the courts.
Allegations of misrepresentation can come about in one of two ways. The first is a mistake on the part of the franchisee in misunderstanding what was being offered by the original agreement and failing to seek professional financial and legal advice. Russell Ford, director of Owen White Solicitors, says: “They’ve almost misled themselves about the details of the business.”
But this doesn’t mean there aren’t cases where the franchisor is at fault and there can be grounds for a misrepresentation case, whether the intention was malicious or benign. “Often it’s a case of expectations being unrealistic,” explains Ford. Obviously a franchisor can’t be expected to take into account every eventuality and can’t offer cast iron guarantees but there are significant errors that can creep in. “Where franchisors do fall down is when they’re issuing projections for a turnover and profits that are based on either their own pilot operation or franchisee experience that’s not up-to-date.”
It’s easy to write this off as a comparatively minor error or mistruth but the consequences can be severe. If a misrepresentation case is successfully made, not only can a franchisee potentially rescind their agreement, freeing them from the contract and entitling them to a refund on their fees, but they may also be entitled to compensation for accrued losses and loss of earnings.
“If there has been deliberate or reckless misrepresentation then that’s classed as fraudulent misrepresentation,” says Ford. Not only does this mean that any exclusion clauses protecting the franchisor are void, opening them up to potentially devastating punitive costs, but there will also be huge representational damage involved in being found guilty in a fraud case. Ford continues: “The finding of fraud in the High Court is a matter of public record – it will massively affect their existing network relations and their ability to recruit in the future.”
In cases where there isn’t a claim of intentional misrepresentation, a franchisee can still attempt to prove either negligent or innocent misrepresentation. “They still have a right to rescind the agreement and possibly claim damages but they then have to overcome all of the exclusion clauses in the contract,” explains Ford. Obviously this retains in place some of those essential legal protections but can potentially still leave a franchisor open to some pretty severe repercussions.
Realistically, it’s going to be better to resolve contract-breaking scenarios out of court. One option is to use mediation to find a mutually beneficial solution. For example, in a case where a franchisee is struggling and seems unlikely to be able to turn things around, it may actually prove prudent to discuss the possibility of an early exit. “That may be by trying to encourage the franchisee to sell the business and to bring somebody else in,” Ford says. “It’s a good way of a franchisor avoiding a claim for damages and what could be risky litigation.”
But, inevitably, the best treatment is prevention. Both franchisee and franchisor can save themselves significant pain by giving the original franchise agreement the due care and attention.
On the franchisor’s part, this takes two forms. First of all, it’s important to ensure they have all of the relevant exclusion clauses in the agreement to limit the impact a court case could have. “Sometimes mistakes do happen and they want to restrict their liability for that,” comments Ford.
The other, and more fundamental, action a franchisor should take is to make sure there isn’t any misrepresentation to begin with. Ford relays the advice he regularly gives to clients and franchisors at seminars: ensure they regularly update their projections and retain evidence of any and all supporting analysis. He explains: “If a franchisor has made a genuine attempt to project what would happen in a business and that’s an honestly put together analysis, they probably wouldn’t be liable for any losses.”
Franchisees can fend off being sold a business on misrepresentative data by doing a little legwork before they sign. “Ask the franchisor what the projections are based on and also talk to a range of existing franchisees,” says Ford. “Find out from the horse’s mouth whether they are demonstrably evidenced by people’s experience.” By getting confirmation of the source of quoted data and finding how it has stacked up against the actual experience of franchisees working in a live environment, a potential purchaser can have a much better idea if there is a whiff of misinformation to the details they’re being sold on.
Evidently then, a little diligence early on can pay dividends and prevent high costs all around. Taking this into account, there’s no excuse for letting the figures in an agreement trip you up.