Franchisors liable for mis-selling
16 February 2009
The recent decision in the case of Peart Stevenson
Associates Limited v Brian Holland has raised some very
important issues for franchisors involved in misrepresentation
claims, or seeking to obtain damages as a result of a
franchisee's breach of its agreement. The franchisor who had
terminated its franchisee and claimed damages ended up on the
receiving end of a £150,000 damages award against it for fraudulent
misrepresentation.
Background
The franchisee in question had signed its franchisor's standard
franchise agreement which:
- allowed the franchisor to terminate the agreement if the
franchisee failed to meet certain revenue targets (a "revenue
clause");
- in the event that the agreement was terminated, prevented the
franchisee from operating a similar businesses in the same location
(a "non-compete clause"); and
- acknowledged that the franchisee had not relied upon any
representations made to it by the franchisor other than those in
the agreement (a "non-reliance clause").
Unfortunately the franchisee had failed to meet the revenue
targets so the franchisor terminated the agreement. Following the
termination, the franchisee started a new business offering similar
services from the same location.
As a result the franchisor filed a claim against the franchisee for
losses arising from its breach of the revenue clause and based on
the non-compete clause in its agreement.
In response, the franchisee filed a counterclaim against the
franchisor for losses arising from the franchisor's
misrepresentations regarding the prospects for the business.
Finding regarding the Revenue Clause and Non-Compete
Clause
While the court agreed that the franchisee had breached the
revenue clause, rather than calculating resulting losses with
regards to the relatively high average revenue achieve by other
franchisees, the court used the relatively low actual revenue
achieved by the franchisee.
Furthermore, the court only awarded the franchisor £2 damages
for the franchisee's breach of the non-compete clause since it was
unconvinced that it had caused any resulting loss to the
franchisor. This decision appears to have been influenced by the
franchisor's failure to recruit a new franchisee for the area for
reasons unrelated to the original franchisee.
Findings regarding the Misrepresentations
The court agreed with the franchisee that it had relied upon
various fraudulent misrepresentations made by the franchisor when
entering into the agreement.
Importantly, the court refused the franchisor's request to enforce
the non-reliance clause in the agreement as an exclusion of its
liability for such fraudulent misrepresentations because:
- either, due to the disparity in bargaining positions between
the parties the clause was an unreasonable exclusion pursuant to
the Unfair Contract Terms Act 1977; or
- because the franchisor did not believe the clause to be
truthful and was aware that the franchisee was relying on its
misrepresentations when executing the agreement.
The court commented that it did not need to decide which of the
above two approaches was correct because they both led to the same
result of the clause being unenforceable.
As a result, the balance of the various claims was an award to the
franchisee for £149,081.99 plus interest against the
franchisor.
This case highlights the importance of ensuring that sales staff
do not exaggerate the prospects for the business when recruiting
franchisees and how vital it is to prove not just a breach but
genuine loss when bringing a claim against a franchisee.
Franchisors must ensure their recruitment procedures and marketing
materials are legally robust and do not expose them to these kinds
of claims. This is a question of legal review and proper training
and precautions. It is very important that franchisors understand
they cannot simply rely on non-reliance clauses in the franchise
agreement and disclaimers. Courts will take all the factors into
account, and franchisors are always likely to be on the receiving
end of misrepresentation claims where there is scope for them to be
brought in such situations.
At our free "Current Issues for Franchisors" seminar on 17 March we
will be devoting a session to Legal Issues in Franchisee
Recruitment and practical steps to take to prevent such claims
being brought and succeeding. For more information about the
seminar contact Louise Wong.
For further information on this or any other franchising issue, or
to discuss how we can help support your franchised business please
contact Mark Abell, Babette
Marzheuser-Wood or Chris Wormald who will
be happy to assist you.