Introduction

In the case of Ali v Abbeyfield VE Ltd (2018 Chancery Division), four former Vision Express optician franchisees were successful in their claim against their franchisor, in which they alleged that they had been induced to enter into their franchise agreements on the basis of false information provided by a Vision Express employee. The claimants brought a claim for fraudulent, or alternatively negligent, misrepresentation against Vision Express.

The case highlights the importance of ensuring that:

  • a franchisor's employees stay on message during the sales process; and
  • information which is provided to prospective franchisees is scrutinised to ensure its accuracy and relevance to the particular investment.

The case also demonstrates that:

  • contractual limitations and exclusions of a franchisor's liability may be unenforceable in some cases; and
  • it is in the interests of both parties to obtain proper legal advice before entering into the relationship, and in particular one that has the additional complexities of a joint venture franchise.

Facts

In 2007 and 2008 the claimants entered into franchise agreements with Vision Express (which took the form of joint venture agreements) to set up and run Vision Express stores in Southport, Llandudno and Macclesfield. Vision Express provided overdraft facilities to assist the claimants with start-up costs. The stores proved to be loss making and, in 2012 and 2013, the claimants terminated the agreements and brought claims against Vision Express. Their claim was that they had been induced to enter into the agreements as a result of fraudulent, or alternatively negligent, misrepresentations made by one of Vision Express's employees (a manager working in business development). The alleged misrepresentations included:

  • the likely performance of the stores;
  • the number of daily eye tests that they could expect to carry out;
  • the conversion of those eye tests into sales of glasses;
  • the time it would take to repay the overdraft and become profitable; and
  • the average performance of Vision Express's new joint venture stores.

Elements of fraudulent misrepresentation

The High Court set out the four components of fraudulent misrepresentation:

  • The defendant makes a false representation to the claimant.
  • The defendant knows that the representation is false, alternatively they are reckless as to whether it is true.
  • The defendant intends that the claimant should act in reliance on it.
  • The claimant acts in reliance on the representation and in consequence suffers loss.

In the case of a fraudulent misrepresentation, there is a rebuttable presumption that it is intended to be relied upon. Vision Express argued that it did not intend the claimants to rely on the representations made.

Decision

The High Court ruled in favour of the claimants. The representations had indeed been made, they were all false and Vision Express, through its employee, either knew that they were false or was reckless as to whether they were true. As fraudulent misrepresentation was found, the High Court did not consider the claimants' secondary case of negligent misrepresentation but had it done so, it would have found in favour of the claimants on this count too.

Vision Express did not rebut the presumption that the representations were intended to be relied upon, and it was clear that it did intend the claimants to rely on the representations made. As there had been reliance, the claimants were therefore entitled to recover their losses arising from the agreements.

The High Court separately considered a clause in the agreements that stated all pre-contractual representations to be relied upon by a franchisee must be annexed to the agreement although, importantly, there was a carve-out for fraudulent misrepresentation. The court did not need to rule on this point as fraudulent misrepresentation was found, but had it done so it would have concluded that the clause was unreasonable for the purposes of Section 3(1) of the Misrepresentation Act 1967 and Vision Express could not rely on the clause to exclude its liability for the misrepresentations. The factors that the High Court took into account when determining reasonableness were:

  • the unequal bargaining position of the parties; and
  • the fact that the claimants did not, nor were advised to, take legal advice on the joint venture documentation.

What it all means

Franchisors should take care to assess the accuracy of information given to prospective franchisees. Franchisors should invest in training their sales staff so that they are attuned to the legal risks which are inherent in any sales process.

The case highlights the importance of ensuring that franchise contracts deal with pre-contract risks appropriately. Boilerplate limitations and exclusions of liability are a useful way of minimising risk and rebutting weak or spurious claims, but if the underlying facts point towards franchisor culpability, a boilerplate clause may not be enough.

Finally, even though the franchise agreement is often presented as a non-negotiable contract, franchisees should undertake their own due diligence (legal or otherwise) of the franchise documentation to flush out any issues before the franchise arrangement is entered into (most people would not contemplate buying a house without a survey).

Equally, franchisors have a vested interest in ensuring that their franchisees take this step, as an open and frank conversation prior to signing can be the difference between a successful partnership and court proceedings further down the line. In some jurisdictions, such as Australia, regulators are seeking compulsory, rather than discretionary, independent financial, legal and business advice for franchisees before they sign final contractual documents. This is an issue which the franchise community in the United Kingdom (currently self-regulated) and the British Franchise Association in particular should give serious consideration to.

For further information on this topic please contact Gordon Drakes at Fieldfisher by telephone (+44 20 7861 4000) or email (gordon.drakes@fieldfisher.com). The Fieldfisher website can be accessed at www.fieldfisher.com.

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.