Introduction

A 'non-reliance' clause is a common feature in franchise agreements. Such clauses contain an acknowledgement by a franchisee that they agree not to rely on any statements or representations which are not expressly set out in the franchise agreement. The purpose of this acknowledgement is to minimise or avoid franchisor liability in respect of pre-contractual statements that it makes and which a franchisee may rely on when deciding to enter into a franchise agreement.

Non-reliance clauses form part of a contractual boilerplate. As such, they are often glossed over without enough due attention to both the construction of the clause and the underlying risk which it is seeking to address in the franchise sales process.

In a recent landlord and tenant dispute considered by the Court of Appeal, which will have ramifications for franchise arrangements, a landlord was unsuccessful in its appeal against a decision at first instance which had held that a non-reliance clause in the lease had attempted to exclude liability for misrepresentation.

The lease contained a clause in which the tenant acknowledged that it had not been entered into in reliance wholly or partly on any statement or representation made by or on behalf of the landlord.

The case demonstrates that:

  • clauses in franchise agreements that attempt to prevent a franchisee's reliance on pre-contractual statements seek to exclude liability for misrepresentation and are consequently subject to the test of reasonableness;
  • such clauses must be fair and reasonable and have regard to the circumstances which were, or ought to reasonably have been, known to or contemplated by the parties when the agreement was made; and
  • it is in the interests of both parties in a franchise relationship to obtain proper legal advice before entering into the relationship to ensure that non-reliance clauses are reasonable and enforceable in light of the relevant factual circumstances.

Facts

First Tower Trustees Ltd (FTT) leased warehouse premises to CDS (Superstore International) Ltd on 30 April 2015. Clause 5.8 of the lease agreement provided that:

The tenant acknowledges that this lease has not been entered into in reliance wholly or partly on any statement or representation made by or on behalf of the landlord.

In responding to enquiries before contract by CDS's solicitors, FTT replied that "the Seller has not been notified of any such breaches or environmental problems relating to the Property but the Buyer must satisfy itself".

On 16 April 2015 FTT's agents received a copy of a report which indicated that there was some asbestos in the premises and on 20 April 2015 FTT's agents received an email from VPS (a specialist firm that they had used) which reported a health and safety risk. None of this information was given to CDS.

Decision

The judge at first instance held that FTT was liable and gave judgment against it for £1.4 million (plus interest) for misrepresentation. The appeal brought by FTT was dismissed in a unanimous judgment by the Court of Appeal.

The Court of Appeal held that Clause 5.8 was an attempt to exclude liability for misrepresentation. It was therefore subject to Section 3 of the Misrepresentation Act 1967 and was required to satisfy the test of reasonableness under Section 11(1) of the Unfair Contract Terms Act 1977. The Court of Appeal stressed that enquiries before contract form an important part of ordinary due diligence. The exclusion of liability would render the enquiries useless. The Court of Appeal was unwilling to interfere with the judge's analysis and concluded that he had not misdirected himself in the law and agreed that the exclusion of liability did not satisfy the requirement of reasonableness.

The Court of Appeal added that the level of sophistication of a party, while not being a ground for whether the test for reasonableness should be applied, should be taken into account when determining whether it was fair and reasonable to exclude liability.

What does this mean for franchising?

Previously, clauses which provided that a buyer had not relied on representations made by a seller in entering into a contract generally prevented (or presented a substantial obstacle for) a buyer from bringing a claim even if the seller had, in fact, made a misrepresentation. Such an approach no longer seems possible in light of this decision, as it confirms that such non-reliance clauses are subject to Section 3 of the Misrepresentation Act and, therefore, the reasonableness test in Section 11(1) of the Unfair Contract Terms Act.

Whether a non-reliance clause is reasonable will always be subject to the facts of each case. In Papa Johns v Doyley (a case relating to the provision of financial information and financial performance projections by the franchisor to the franchisee during the recruitment process), the court held the non-reliance clause in the franchise agreement to be unenforceable because it had failed to satisfy the reasonableness test in the Unfair Contract Terms Act. In this case, the court took into account:

  • the inequality of bargaining power between the parties;
  • Papa Johns' insistence that the agreement was non-negotiable; and
  • the fact that the standard boilerplate clauses in the franchise agreement had not been brought to the franchisee's attention.

This is in contrast to Henry Boot v Foodco (which involved performance projections provided by a landlord to franchisee tenants regarding motorway service stations) in which the bargaining power between the parties was more equal than in Papa Johns. The court held that the non-reliance clause in that case was enforceable and that there was no doubt that it was reasonable after considering the following factors under the Unfair Contract Terms Act:

  • there was no substantial imbalance of bargaining power between the parties;
  • each of the tenants had been advised by solicitors;
  • the non-reliance provision was open to negotiation; and
  • the clause permitted reliance by the tenants on any replies given to them by Henry Boot's solicitors.

Comment

In assessing the concept of reasonableness, it is necessary to take into account the extent to which each side was advised and whether the relevant term was a 'take it or leave it' term or truly negotiable. Franchisors must also keep in mind the extent to which a franchisee is encouraged to make their own pre-contractual enquiries and take legal advice; otherwise, such a non-reliance clause is likely to fail the applicable reasonableness test.

Further, even though franchise agreements are often presented as non-negotiable contracts, 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 to ensure that the information provided about the franchise that they are buying is reliable. It is in the franchisor's interests that a franchisee takes legal advice prior to signing the franchise agreement. In jurisdictions where franchising is regulated, such as Australia, this is a mandatory requirement.

Finally, although there is no legal requirement in the United Kingdom for pre-contractual disclosure in franchising, it is always prudent for franchisors to try and minimise any risk associated with misrepresentation by providing franchisees with a disclosure document that contains accurate information about the franchise business, such as its past financial performance and possible projections. It is crucial that this is always checked carefully by a qualified franchise lawyer and reviewed regularly to ensure that it keeps up to date with developments in the law and the franchisor's business. Adequate disclosure is a requirement of the Code of Ethics, which applies to franchisor members of the British Franchise Association (BFA), although experience suggests that the form and extent of actual disclosure by BFA-accredited franchisors varies significantly.

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

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