Avoiding the misrepresentation claim and ending up on the wrong side of the law

When a salesperson misrepresented the facts to prospective franchisees it landed the franchisor in court. This is how you can learn from their mistake

Avoiding the misrepresentation claim and ending up on the wrong side of the law

With many franchise shows coming up, franchisors will be focusing on recruitment strategies. However, they better ensure they stay on the right side of the law when sourcing talent for their networks. This article highlights a relevant recent case to avoid unlawful practices during the recruitment stage.

It’s a standard franchisee argument for those seeking early release from a franchise contract to claim information was misstated which induced them to enter into the contract. In order to successfully establish grounds for fraudulent misrepresentation, a franchisee must have evidence of such misrepresentations, demonstrate reliance placed on such evidence and demonstrate that such representations were made fraudulently.

This has often proved a high standard to meet and has been a costly exercise resulting in many franchisee claims settling long before court proceedings even commence.

That wasn’t the case with a recent claim that went all the way and was successfully won by the claimant franchisees. This case should serve as a warning to franchisors of the dangers of overstating achievable revenue and forecasts when sourcing talent to your network.

The salient facts

In this case four franchisees entered into joint venture hybrid franchises with a well-known high street optical retailer. They were told the standard practice was that the franchise agreements were non-negotiable, they weren’t advised to take their own legal advice and accordingly none of them did so.

Prior to signing the franchise agreement the franchisees were given misrepresented facts about the performance of their store by a member of the franchisor’s sales teams. This included overstated information about the volume of eye tests conducted on a daily basis at each store and actual performance metrics for each stop. The franchisor then operated a fast track prospect onboarding process designed to accelerate, without following proper procedures, the acquisition of franchises by prospects.

The franchise agreement also included a clause typical of most franchise agreements to exclude pre-contract statements unless made fraudulently. Such clauses are common to franchise agreements and as part of a standard franchise agreement review would be drawn to the attention of your franchisee. But in this instance the franchisees weren’t directed to seek independent advice and therefore didn’t do so.

The verdict

The court held that, firstly, the representations made about the stores by the optical retailer’s employee were made fraudulently – either with knowledge of those representations being incorrect or made recklessly without adequate verification.”

Secondly, the court was of the opinion the clause excluding pre-contract statements was unreasonable in law. When reaching its verdict it took into account the fact that the franchisees weren’t made aware of its inclusion in the contract and the fact that the franchisor had stronger bargaining power.

Word to the wise

So where does that leave you? Well, it’s vital that franchisors encourage franchisees to get their contracts checked. That way ignorance cannot be a valid argument.

Franchisors should also consider checking the enforceability of their pre-contract statement exclusion clauses in the light of this decision.

Staff at all levels must be made aware of the impact of overstating store performance or any untruths or non-verifiable information that may induce taking a franchise.

The courts have sided with the franchisee in the face of the B2B contract between the parties. Taking into consideration inequality of bargaining position, unscrupulous franchisors that engage in extreme practices to sell franchises or who fail to adequately police rogue staff should beware.

So when you go out to the shows this season, make sure you take all the precautions you can to avoid your recruitment drive becoming a legal nightmare.”

Fiona Boswell
Fiona Boswell