Franchising · 27 October 2017

Do I have grounds to take my franchisor to court for misrepresentation?

Cropped shot of a businessmen working at his desk in a modern office
If a franchisor has made statements which you now know are incorrect that induced you to sign a franchise agreement, you may have a claim for misrepresentation

Business Advice legal expert David Walker responds to a concerned reader who paid a significant sum to enter a partnership with a new franchisor but, after doubting the legitimacy of the company, declined to sign the franchise agreement put on the table.

Is there any way she can legally retrieve compensation for all investments so far? Was the contract unknowingly entered verbally or in writing, or when money exchanged hands? If false claims were made by the franchisor, it might be a case of misrepresentation.

Question

I recently signed up for a franchise specialising in customer relationship management (CRM), having seen the company advertising on its website for new franchisees.

In total I paid the company £13,000, plus VAT. They sent across a franchise agreement but, due to the following reservations, I have never signed it.

At the bottom of their franchise website they give a sales projection. I asked what the basic one was based on, and they said spending about £400 per month on Facebook. This isn’t working for anyone.

Initially I told them I only had about £3,000 left for advertising. Using their projections, I found this could work as it would be cash flow positive in about six months. I was getting made redundant and could live without any income for that amount of time.

I used part of my pension to fund this. We are now competing with big companies like Salesforce, Insightly and Zoho for part of the CRM market. They spend millions on getting their customers.

I have realised that this company would need franchisees with at least £20,000 behind them for the advertising costs.

I am now not sure whether it is a proper franchise at all. They obviously won’t consider a refund of any sort. Do I have any legal basis for taking the franchisor to court for reimbursement?

Answer

Thank you for your enquiry about the franchise problems you are having.

I’ve had a look at the website you referred me to and I agree that this doesn’t look like a proper franchise arrangement. It seems to be more like a sales agency and they are just using the term “franchise” to make it seem more appealing and look like you’re running your own business.

I note that they have sent you an agreement, but you haven’t signed it. However, as you have paid them a fee and started work there will be a contract of some description between you.

Have you ever challenged, disputed or tried to re-negotiate any of the terms of the draft contract? If not, then they could argue that they have a verbal agreement with you (if say you signed up following a discussion on the phone) or a written agreement (if say you exchanged emails confirming you wanted to sign up).

They may then try to argue that if the terms weren’t challenged, the draft contract is evidence of the terms you have agreed (even though it hasn’t been signed).

If you did challenge the terms of the contract or tried to renegotiate them, then it is clear that the draft contract was not accepted. However, it then becomes much tougher to determine what the terms of the contract between you are.

Once you have determined what the terms of the contract are, you can then look to see if they have been breached by the franchisor. If they have, then you are entitled to take legal action for breach of contract.

Your aim is then to claim the amount of compensation you need to put you in the position you would have been in had the contract been performed properly.

It’s difficult to advise without knowing all the facts, but they have made some pretty bold claims on their website. Did they make any statements which you now know are incorrect that induced you to enter into the contract? If so, you may have a claim for misrepresentation.

In reality, many people in this situation don’t try to claim the full amount of compensation they are due, but instead are content to claim a refund of the fees they have paid.

If you have a similar query relating to franchise agreements and fee disputes, email me at editors@businessadvice.co.uk and I will happily respond

Understanding the key provisions of your franchise agreement

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ABOUT THE EXPERT

David Walker is the founder of Grid Law, a firm which first targeted the motorsport industry – advising on sponsorship deals, new contracts and building of personal brands. He has now expanded his remit to include entrepreneurs, aiding with contract law, dispute resolution and protecting and defending intellectual property rights.

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