This short article seeks to review the position concerning misrepresentation. Misrepresentation claims are on the up and it is important that franchisees and franchisors know what they can or can't do.

Whenever a franchisor provides information to a franchisee with the aim of inducing that franchisee to enter into the franchise agreement, then there is the risk if that information is not accurate, then that will amount to a misrepresentation. Franchisors generally do not give "guarantees" of future profitability but do provide prospective franchisees with a great deal of information about the franchise on which prospective franchisees base their decision whether to proceed. This information has to be based on facts.

The most likely area for a misrepresentation claim relates to financial information which a franchisor provides a prospective franchisee. The reason is simply that usually the most important element in any decision as to whether to proceed with a business venture is the financial aspect of the proposal. Franchisor's very frequently provide franchisees with start up and set up costs and sometimes participate in the preparation of business plans and cashflow forecasts. All of this information has to be based on actual average performance of franchisees so that a franchisor cannot indicate that shop fitting costs would be £50,000 when the franchisor knows or ought to know that the average costs of existing franchisees' shop fitting is £100,000. Likewise franchisors cannot produce cashflow forecasts/business plans indicating a turnover in the first year of £100,000 and a profit of £20,000 when the average performance of their franchisees in the first year is only £50,000 and £10,000 respectively.

Franchisors seek to protect their position when providing information, particularly financial information, by inserting disclaimers on the information. They also insert provisions in their franchise agreements making it clear that franchisees have not relied on any representations that they have provided. It is, as a result, essential that franchisees carry out their own due diligence and checks on the information provided to them by franchisors although certainly in respect of financial aspects this is difficult to do because franchisees will not have access to the average performance of other franchisees.

Although franchisors do seek to protect their position with disclaimers and contractual provisions there is a limit to their ability to do so successfully. The courts do not allow parties to obtain protection from their own fraudulent misrepresentation. In other words if a franchisor can persuade a court that they honestly did not know that the information that they were providing to prospective franchisees was not correct, then it is very likely that contractual provisions and disclaimers will protect them.

If on the other hand a franchisee is able to persuade a court that the franchisor either knew that the information was incorrect or was reckless as to whether the information was correct - not caring whether it was or it wasn't - then that could amount to a fraudulent misrepresentation.

If a franchisee is able to persuade a court that the franchisor has made fraudulent misrepresentations then contractual provisions will not protect the franchisor and franchisees would be able to terminate the franchise agreement and claim damages against the franchisor for the loss that they have suffered. Franchisees should however be aware that misrepresentation actions are (like most legal proceedings!) expensive, time consuming and difficult to win. Another potential danger is that the franchisor, if sued by a significant number of franchisees, simply won't have the money to pay any judgement that the franchisees obtain against the franchisor.

John Pratt, Partner
Hamilton Pratt