Tips to avoid being sued for misrepresentation

April 19, 2022

 

By Stephen Thompson

Anyone who has been involved in the franchising industry for any period will probably be familiar with the concept of misrepresentation (misrep).

A misrep is an untrue statement of fact or law made by Party A (or his agent for the purposes of passing on the representation, acting within the scope of his authority) to Party B, which induces Party B to enter a contract, thereby causing Party B loss.

In the franchising context, a misrep is generally a pre-contractual statement that a franchisor makes to a franchisee to induce it to enter into a franchise agreement.

When a disgruntled franchisee is looking to exit a franchise network because a franchise has not worked out, and has instructed a solicitor to write a pre-action letter to the franchisor, alleging misrep is often the franchisee’s first line of attack legally.

In the process of selling a franchise to a prospective franchisee, the franchisor (and its servants and agents) will generally make many representations in relation to the franchise business, including in relation to likely performance levels and profitability. It is very easy, during this sales process, to say things which are a bit of an over exaggeration, for the purpose of securing the sale. Unfortunately, if a franchisee is subsequently able to demonstrate that the franchisor has made a misrep, the franchisee may be able to establish a claim for misrep against the franchisor.

If a franchisee is able to establish a claim against a franchisor for misrep, its remedies are “rescission” of the franchise agreement and also damages. The rescission of a franchise agreement will mean that it is treated as not having existed – it is basically void. That means that the franchisor will not be able to rely on any of the legal protections afforded by the franchise agreement, including confidentiality and non-compete covenants. From a commercial perspective, this is obviously very bad news for the franchisor and may well expose it to significant commercial risk.

In addition to the rescission of the franchise agreement, the franchisee will be entitled to claim damages to put itself back in the position it would have been in had it not entered into the franchise agreement in the first place. Such damages will include the sums paid to the franchisor for the franchise, money wasted on the franchise business, potentially lost profits on missed opportunities elsewhere and also damages for distress and inconvenience.

There are 3 types of misrep – innocent, negligent and fraudulent, and the potential remedies available to the franchisee depend on the type of misrep that the franchisee is able to establish.

In the worst case, if the franchisee is able to establish fraudulent misrep (which does not require dishonesty on the part of the franchisor – just that the representation was made knowingly, without belief in its truth, or recklessly as to its truth), the franchisee’s remedies include rescission and also damages. In relation to damages for fraudulent misrep, they do not have to be “reasonably foreseeable” and might include, for example, a loss of profit that the franchisee has made on another investment that it could have made, had it not invested in the franchise.

In addition, fraudulent misrep brings with it the potential exposure of the franchisor’s directors to liability personally, depending on the extent of their involvement in and knowledge of the misrep.

The good news is that a franchisor can, by taking reasonable steps, significantly mitigate the risk of a franchisee making a misrep claim. Such steps include checking all marketing and sales literature for accuracy, making sure that sales staff are aware of the importance of not overstating the position, keeping them “on message” and ensuring that financial projections are properly prepared on a reasonable basis, which can be evidenced if necessary. Whilst taking such steps will not guarantee that a franchisee will not make a misrep claim, it will make it very difficult for them to do so and also put the franchisor in a much stronger position to defend its position.

 

If you would like more information about misrepresentation or a related matter, get in touch with Stephen Thompson on sthompson@darwingray.com, or call on 029 2082 9136 for a free, no obligation conversation.

 

 

Contact Our Team
Catherine Burke
Partner
View Profile
Damian Phillips
Partner
View Profile
Fflur Jones
Managing Partner
View Profile
Gareth Wedge
Partner
View Profile
Mark Rostron
Partner
View Profile
Nick O’Sullivan
Partner
View Profile
Owen John
Partner
View Profile
Rhodri Lewis
Partner
View Profile
Stephen Thompson
Partner
View Profile

I have worked with Darwin Gray for a number of years and the level of service, professionalism and timely response is second to none. I would highly recommend Darwin Gray to any business.”

Becs Beslee, Dice FM Ltd

Darwin Gray have provided us with a first-class service for many years now. They really take the time to understand our business and develop relationships which results in advice and support that is contextualised and effective.”

Rebecca Cooper, ACT Training

We have worked with Darwin Gray for several years and have always found their services and advice to be first class.”

Karen Gale, Stepping Stones Group

An extremely professional and sincere company who make time for your queries and understand the need to break down certain facts and information to ensure everything is understood perfectly. I would highly recommend the company to anyone looking for any type of legal advice”

Gwawr Booth, Portal Training Ltd

PSS has worked with Darwin Gray for many years. We have always received an excellent service. Prompt and professional advice and support.”

Ledia Shabani, Property Support Services UK Ltd

We have used several departments within DG recently and we have been very pleased with an effective, efficient and down to earth service. Very happy thus far and I expect that we will continue to use DG.”

Guto Bebb, Farmers’ Union of Wales

Darwin Gray offer us truly superb services. Very professional, quick and services available bilingually which is very important to us, highly recommend.”

Iwan Hywel, Mentrau Iaith Cymru

My “go to” in urgent and time sensitive cases for direction, support and advice. The team are quick to respond to calls or emails for advice and support on all matters. Always explain complex matters in a way a lay person can easily understand.”

Margot Adams, Guarding UK Ltd