Legal advice
Resisting temptation
The temptation in difficult economic periods, with prospective franchisees in short supply, is to tell them all they want to hear. Providing assurances and promises can be fraught with danger. Here's how to avoid misrepresentation claims
The inevitable result of telling borderline truths is that when things begin to go wrong, the failing franchisee's ‘swan song' will be a misrepresentation claim. A misrepresentation claim is a claim that a party to an agreement was induced to enter into an agreement by statements made by the other party, which statements were, in fact, untrue.
The first step in protecting yourself from such claims is to ensure that the franchise network has entered into a franchise agreement which protects you, the franchisor. The agreement should:
- Confirm that no representations have been made, or if representations have been made, require the franchisee to attach the representations to the franchise agreement. In practice this will give you an opportunity to explain to a franchisee any misunderstanding as to what was or was not said and its legal effect;
- Confirm that the franchisee has had the opportunity to obtain legal advice and understands the franchise agreement including the "no representation" clause;
- Confirm that the franchisee is required to notify the franchisor of his intention to bring a misrepresentation claim within a fixed time - such as two years - of entering into the agreement;
- Contain an "entire agreement" clause which prevents a franchisee arguing that other documents provided to them give them rights which conflict with the terms of the franchise agreement.
No agreement can protect a franchisor from fraudulent misrepresentation. Many franchisors provide sample turnover figures to prospective franchisees. A common complaint that franchisees raise is that these figures indicate higher levels of growth and turnover than those that were actually experienced. Franchisors should use a clear disclaimer and set out the source and basis for their figures. It is not sufficient for a franchisor to state that the figures were merely an ‘example', or that it was for the franchisee to have researched the market and completed their own due diligence. A franchisor must accept that the Courts recognise that franchisees are in a weak position because a prospective franchisee is not privy to the franchisor's knowledge of the market or confidential information and therefore has to rely on the franchisor. This means that the Courts do generally require a franchisor to be open and honest with prospective franchisees.
Provided that a franchisor bases its figures and statements on fact (and not fiction), clearly states on what it has based its information, fairly selects the data on which it provides information to a prospective franchisee, updates the data regularly and keep copies of the data on which it relies as well as using the contractual provisions and disclaimers referred to above, then they should have nothing to fear from misrepresentation claims!
Author's note: James Dexter Barrett is an assistant solicitor at Hamilton Pratt.
