It is unusual for franchise disputes to make it all the way to the courts, so when they do it provokes a stir amongst the franchise community. Such cases provide valuable direction as to what should be avoided or addressed in franchise practice and agreements and the recent high court case of Ali V Abbeyfield V.E. Limited  EWHC669 (Ch)) is no exception.
Here a group claim brought by four individuals who entered into joint venture agreements with Vision Express to operate franchised Vision Express stores succeeded in their claim that they were induced by Vision Express (VE) to enter into these joint venture agreements after false representations were made to them by an employee of Vision Express as to the likely performance of the stores. The claimants had argued that the misrepresentations were either fraudulent or in the alternative negligent (fraudulent misrepresentation being the highest threshold to climb over in such claims) and the Court agreed finding Vision Express to be liable for making fraudulent misrepresentations and entitling the claimants to damages as a result.
Facts of the case
- During the period 2007-2008, the claimants, each entered into joint venture agreements with Vision Express to establish new stores in Southport, Llandudno and Macclesfield.
- All three stores were loss making and in 2012 and 2013 the claimants terminated their joint venture agreements and brought a claim against Vision Express that Vision Express had, through a former employee, fraudulently or negligently misrepresented the likely performance of their stores in terms of the:
- number of daily eye tests;
- conversion of those eye tests into sales;
- average performance of the new stores;
- usual time it would take to repay the overdraft on a new store and move into profitability; and
- location of previously failed joint venture stores.
- In the alternative, the Claimants bought a secondary claim of negligent misrepresentation under section 2(1) of the Misrepresentation Act 1967.
- The joint venture agreement (as many standard franchise agreements do) contained a clause excluding any pre-contractual statements except for those which are annexed in writing to the agreement or pre-contractual statements made fraudulently.
- The selection process and approach to the recruitment of new franchisees lacked caution and appeared to push prospective franchisees through at speed and without proper procedures being followed. Projections for the stores were provided by Vision express’s employee without appropriate disclaimers and these figures included in the prospective franchisee’s application to Vision Express’s final approval committee.
The claimants were not advised, at any time during the selection process, to take independent legal advice and the terms of the joint venture agreement were presented as non-negotiable.
- In determining where there had been fraudulent or negligent misrepresentation, the court had to consider whether:
- The representations were false.
- The defendant knew that the representations were false or was reckless as to whether they were true or false.
- The defendant intended for the claimant to act in reliance of the misrepresentations.
- The claimant acted in reliance of the representation and as a consequence suffered a loss.
- The court concluded that the representations (made through VE’s employee) “were all false, and that they were all fraudulent in the sense that VE either knew that they were false or was reckless as to whether they were true or not”.
- The court did not have to consider the secondary claim for negligent misrepresentation, although the court did express the view that even if VE’s employee genuinely believed the representations that it would have found that “there were no reasonable grounds for such a belief in the case of any of the representations, for the purposes of s. 2(1) of the Misrepresentation Act 1967”.
- Further the court concluded that it would have found the clause in the joint venture agreement excluding any pre-contractual representations was unreasonable for the purposes of s. 3(1) of the Misrepresentation Act. This is an important point as the type of clause included is typical of the type of clauses found in many franchise agreements. The Court considered that contributory factors to the lack of reasonableness were:
- The strength of the bargaining positon of the parties as Vision Express was in a far greater bargaining position than the claimants and the agreements were presented as non-negotiable;
- The fact that the clause was buried within other contractual terms and not brought clearly to the attention of the franchisees nor were the franchisees, none of whom took legal advice nor were advised to do so;
- The clause provided for an elaborate mechanism to agree and annex those representations which the franchisee was relying but in practice this never happened and could not practicably be complied with by the claimants in any event.
The case reinforces the need for franchisors to have a clear documented selection and recruitment process in place for the recruitment of franchisees and adequate training for all those involved as to the risks of over-selling and providing false information.
Any representations made during application/recruitment process should be carefully monitored and all prospective joint venture partners and franchisees should be advised from the outset to seek independent financial and legal advice.
In addition the typical boilerplate clause in franchise agreements which seeks to limit liability for pre-contractual misrepresentations should be considered in light of the court’s judgement. Such clauses can be a very useful protection but only if enforceable and too often these are buried at the back of a lengthy document with inadequate explanation to a franchisee.
Franchisees should conversely seek to verify the integrity of any representations they are relying upon and ensure that they keep evidence of all representations made to them.