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Can you really rely on your No-Reliance Clause?

26 November 2007

Many franchisors are, with good reason, nervous about misrepresentation claims.  If a franchisee's business fails, the franchisee will undoubtedly attempt to blame the franchisor.  It is also highly likely that at some point an allegation of misrepresentation will be made. 

To succeed in a misrepresentation claim, a franchisee will have to prove that a false statement of fact induced him to enter into the agreement and he has suffered loss as a result.  The inducement element is therefore crucial to the claim.  Franchisors often seek to protect themselves from misrepresentation claims by including a statement in their agreement that the franchisee has not relied on any pre-contractual statements when deciding to enter into the agreement. 

The courts have recognised the efficacy of no reliance clauses in franchise agreements.  For example, in the case of Fleet Mobile Tyres Ltd -v- Stone & Anor [2006] EWHC 1947 the High Court Judge held that, whilst a no reliance clause does not guarantee complete protection, the franchisee's task of proving that he did, in fact, rely on a pre-contractual statement in the face of a clear statement in the agreement that he did not, is made very much more difficult.

The recent case of Quest 4 Finance Limited -v- John Maxfield and Others [2007] EWHC 2313 tells a cautionary tale as it shows that a misrepresentation claim will not always be defeated by a no reliance clause.  The Quest case did not relate to a franchise agreement, but the principles will apply to any commercial contract.  In Quest, the court held that the Claimant could not rely on a no reliance clause to defend itself from a misrepresentation claim when the terms of the contract entered into clearly contradicted information given in the Claimant's brochure and the Defendant showed that he had relied on the statements in the brochure.

The Quest case should be a salutary reminder to franchisors that their no reliance clauses are not infallible.

Practical Lessons for Franchisors

  1. Regularly review your franchise agreement to ensure it is still protecting your business properly.
  2. Regularly review your marketing and promotional literature, and your franchisee sales pitch, to ensure that they are correct and up to date.
  3. Ensure you have documents to substantiate any statements and figures quoted.
  4. Consider investing in a Disclosure Document which is given to all franchisees during the recruitment process summarising the franchise offering and key aspects about the business.

For more information, or advice on how to minimise your business' exposure to misrepresentation claims, please contact Mark Abell or Victoria Hobbs.