What actions can a franchisee take in the event of mis-selling by the franchisor? Would these still be available if there was a disclaimer in the franchise agreement, disclosure document or sales material?
Franchise & Licensing
In general, the means by which a franchisee can react to such event would in principle involve filing a court action against the franchisor, upon giving a prior reasonable period for it to remedy the infringing situation; in such court action, the franchisee can claim compensation for any misleading information provided in respect of the goods and services agreed to under the franchise agreement.
Regarding the use of any disclaimer in the franchise agreement, disclosure document or sales material, subject to reviewing the specific wording of such disclaimer, our view is that this would not prevent the risk of the franchisor being liable for any mis-selling, since, in theory, he should be responsible for providing the goods or assets in accordance with the quality standards which he has agreed to but this should be assessed on a case-by-case basis.
There are two types of remedies available for franchisees who were enticed to purchase a franchise as a result of a franchisor’s mis-seling or misrepresentation: the right to sue for damages and the right to rescind the franchise agreement. If the franchisee suffers a loss because of a misrepresentation contained in the disclosure document, the franchisee will have a right of action for damages against the franchisor and against every person who signed the document – in other words, those who sign the disclosure document have personal liability.
More significantly, if the franchisor delivers the disclosure document late, the franchisee has the right to rescind the franchise agreement, without penalty or obligation, within 60 days after its receipt of the disclosure document. If the document is never delivered or is so deficient as to be deemed to have never been given, that rescission right is extended to two years after the date that the franchisee signs the franchise agreement.
In the event of rescission, the franchisor and everyone who personally signed the disclosure document must compensate the franchisee for any losses it incurred in acquiring, setting up and operating the franchise. In other words, by not disclosing (or not disclosing properly), the franchisor is effectively insuring the franchisee’s investment and potential business losses for the first two years of its operation. This liability also extends to persons identified as ‘franchisor’s associates’ (ie, persons who control, are controlled by or are under common control with the franchisor and who either are involved in the approval of the grant or exercise significant operational control over the franchisee and to whom the franchisee owes a continuing financial obligation in respect of the franchise).
A franchisor may not contract out of these remedies, or otherwise shield itself from liability through specific disclaimers or disclosure statements to that effect.
Franchisee may opt for instituting agreement-termination and damage proceedings against franchisor; however, the chances of success would reduce in case there was a disclaimer in the franchise agreement, disclosure document or sales material. Note, however, that gross negligence is not waivable in Chile, thus, such disclaimer would not suffice in case the event of mis-selling is regarded by a local court as a gross negligent act or action of the franchisor.
Mis-selling is not regulated by the legislation of the Republic of Azerbaijan
There are no legal requirements to disclose certain information relating to the franchise prior to entering into the franchise agreement.
Franchisor's misrepresentation or mis-selling of information other than the franchise concept may entitle franchisee to rescind the agreement based on failure of basic assumptions.
Disclaimers are generally considered legally binding under Danish law. However, the Danish courts may adjust the disclaimer or rule that it is invalid based on the following:
(i) Formation of the agreement. The franchisee must have subjective knowledge of the disclaimer and its legal consequences when entering into the agreement in order for the disclaimer to be binding.
(ii) Interpretation. Unilateral clauses are usually interpreted against the drafting party, and Danish courts typically interpret broad disclaimers restrictively.
(iii) Validity. A disclaimer may in exceptional cases be deemed invalid pursuant to Section 36 of the Contract Act.
Franchisee's options for making use of the ordinary remedies for breach in a situation where the franchisor has included a disclaimer in the franchise agreement will depend on the specific wording of the disclaimer and whether the disclaimer is adjusted or ruled invalid based on the test explained above.
It should be noted that there is no sale in the franchise it is a license of a right from the franchisor to the franchisee. So, applying this to the question i.e. if the rights subject of the license are deceptive, this means bad faith of the franchisor and in the event that the franchisor knows that the rights are not owned by him or licensed to him, this will keep the franchisor liable for any claims filed by third parties and in particular the owner of the rights. And the franchisee may annul the agreement executed with the franchisor for fraud. It goes without saying that the franchisee may claim compensation for any damage that the franchisee has sustained as a result of such fraud based on the general rule indicated under Article (163) the Egyptian Civil Code” whoever commits an error causing harm to a third party shall be liable to compensate therefor”.
A franchisee may seek relief under general contractual laws relating to fraud, misrepresentation, or a breach of the duty of good faith. A franchise agreement can also be voided where it violates the general principles of a valid contract, or the pre-contractual disclosure requirements.
According to the general provisions of the Greek Civil Code on error and fraud, liability in the course of negotiations and torts (articles 140-149, 197-198, 914, 919), if the franchisee has been misled on material issues of the franchise, he has the right to terminate the franchise agreement and/or claim compensation for any damage suffered. What is a material issue depends on the circumstances of the case. According to the law, an issue is material, if the franchisee would not have entered the contract had he been aware thereof.
Disclaimers may not restrict liability for fraud or gross negligence.
The mis-selling by the franchisor could result in the termination of the agreement on the franchisor’s responsibility that have breached the agreement. The breach of the agreement entails the contractual liability of the party in breach (ie. The franchisor in this case) and the obligation to compensate the other party (the franchisee) for all loss suffered by such breach.
As for the disclaimer clause, any clause in the agreement that cancels the protection of the franchisor or franchisee and the specificity of the franchise agreement through emptying the agreement from its basic elements is considered as void. Please note that so far there is no case-law related to this matter.
As an illustration, Article 11 of the Consumer Protection Law No. 659/2005 may be applied on the case of mis-selling by the franchisor.
Article 11: A misleading advertisement means an advertisement which by any means
includes a false representation, declaration or pretense or which contains
expressions of such a nature as to mislead or deceive the consumer, either directly
A representation, declaration or pretense should be considered misleading where
treats, inter alia, of one of the following issues:
- The nature, composition and essential characteristics of the goods as well as the elements or the element's quantity of such goods.
- The origin, weight, volume, manufacturing method, expiry date, directions for use or safety instructions of the goods.
- The type of the service and the agreed place for the provision of such service; the safety instructions and the essential characteristics in terms of quality or benefits to be expected from such service.
- The contract terms, the total price and the method of payment.
- The advertiser's obligations.
- The identity, qualifications and description of the manufacturer or supplier.
The following shall also be considered a misleading advertisement:
- The false declaration by the advertiser that he holds prizes, certifications, attestations or private or official medals, and the claim of scientific foundations not supported by evidence or facts.
- The advertisement which include the illegal use of a logo or a trademark, or the use of an imitated or simulated mark.
There is no clear definition of mis-selling in the franchise legal framework. Where the so-called “mis-selling” due to concealing information by franchisor which affects the performance of the franchise contract or discloses false information and causes non-performance of the franchise contract, the franchisee may unilaterally terminate the franchise contract. The franchisee may report to the administration of market regulation and the franchisor may have the administrative punishment.
If there was a misrepresentation by the franchisor in the franchise agreement, it could be considered as a defect (vice) in the consent granted by the franchisee based on error (false appreciation of reality) which, when such error is the main motive influencing the franchisee’s will to enter into the agreement, it may result in such agreement being void.
Therefore, it is suggested to include a disclaimer in the disclosure document establishing that the franchisor does not guarantee any results that would derive from the operation of the franchised business, and in such case, the franchisee would not have any actions available against the franchisor. Same type of disclaimer should also be incorporated into the franchise agreement.
In the absence of a franchise law, the Peruvian Civil Code and the Peruvian Judicial Procedures Code govern this issue. Therefore, the franchisee can issue proceedings against the franchisor trying to obtain adequate remedy, most likely an award of damages against the franchisor. However, it will be very difficult to obtain an efficient and fast result before the Peruvian Judicial Power.
Franchise agreements are governed by the provisions on obligations and contracts under the Civil Code of the Philippines (“Civil Code”). Under the Civil Code, mis-selling by the franchisor, when made deliberately, amounts to fraud. In such cases, the franchisee’s remedy would be to file a complaint for damages when the mis-selling is merely incidental to the execution of the franchising agreement, or for annulment of the franchise agreement when the mis-selling is direct and causal.
Any disclaimer made by the franchisee is, generally, inconsequential. Under Philippine jurisprudence, responsibility arising from a fraudulent act cannot be waived because such waiver is contrary to public policy [Philippine Commercial International Bank v. Court of Appeals, G.R. No. 97785,29 March 1996].
If franchisor is mis-selling and breaching under the executed franchise agreement, franchisee may claim the contracted performance of obligations from the franchisor and enforce the latter into fulfillment of breached obligation in court. If certain penalties are provided in the contract, penalties may also be claimed in addition to damages (if any). Finally, if mis-selling or other breach by franchisor is set out as the condition for termination of the franchise agreement, franchisee may claim termination on these particular grounds.
In relation to “mis-selling” I am presuming you mean misrepresenting the potential franchise business by the franchisor. The Fair Trading Act 1986 and the Contract and Commercial Law Act 2017 would be very useful in such circumstances. If the franchise agreement contains a disclaimer clause then that may or may not save a franchisor who misleads a franchisee – it would depend upon the extent of the disclaimer clause and all of the circumstances.
Franchisee Actions in Event of Mis-Selling
In the event that a franchisor failed to comply with applicable franchise laws in offering or selling a franchise, and the franchisee would like out of the franchise relationship, its options vary depending on the particular state at issue. While there is no private right of action under the the Federal Trade Commission (the “FTC”) Franchise Rule (the “FTC Rule”), a franchisee who was not properly disclosed or who purchased a franchise relying upon misleading or incomplete information may be able to bring claims against the franchisor under certain state franchise laws (which also require that prospective franchisees be furnished with a franchise disclosure document (the “FDD”) prior to the offer or sale of a franchise in such state, and which prohibit disclosures that are misleading or fraudulent). In particular, the laws of California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington and Wisconsin each statutorily afford franchisees a private right of action to sue for damages or for rescission (i.e., essentially nullifying the franchise agreement and restoring the franchisee to the same position it would be in had it never acquired the franchise).
In addition, many states (including states with no franchise laws or regulations of their own) have enacted statutes, colloquially referred to as “Little FTC Acts,” which render illegal any conduct that would be violative of the Federal Trade Commission Act (the “FTC Act”) and the regulations promulgated thereunder (including the FTC Rule). Unlike the FTC Act and the FTC Rule, however, these Little FTC Acts often confer private rights of action upon aggrieved franchisees (either expressly by statute or by virtue of case law that has conferred standing under such statutes) instead of reserving those rights to governmental authorities alone. Thus, if a franchisor violates the FTC Rule by failing to timely furnish a franchisee with a compliant disclosure document (or otherwise), the franchisee may attempt to hold the franchisor liable under such state Little FTC Acts. Notably, Little FTC Acts typically permit the franchisee to sue for damages, rescission and legal fees and expenses.
Effect of Disclaimers
Incorporating disclaimers into franchise agreements may, in certain circumstances, help a franchisor defend itself from franchisee claims. However, such contractual disclaimers are not always dispositive and, under many franchise laws, are outright illegal.
While the the FTC Rule does not prohibit integration clauses or contractual waivers, it does prohibit franchisors from disclaiming, or requiring a prospective franchisee to waive reliance on, representations made in their FDDs. Because of this, it is quite common for franchisors to include in their franchise agreements: (a) provisions disclaiming responsibility for any unauthorized financial performance representations or claims made by its salesmen during the franchise sales process and (b) franchisee representations stating that the franchisee was properly disclosed with the FDD. Importantly, however, a franchisor may not disclaim an actual authorized representation made by its salespeople or included in its FDD, nor may it require or permit the franchisee to waive its right to receive timely disclosure of an FDD (any such waiver would be deemed invalid and unenforceable).
In addition, most state franchise laws specifically prohibit franchisors from committing any “fraudulent” and/or “unlawful” practices in connection with the offer and/or sale of franchises. Examples of such “fraudulent” and/or “unlawful” practices include the following: the intentional making of an untrue statement of a material fact; the intentional omission of a material fact the absence of which renders another statement misleading; a scheme or artifice to defraud; an act or practice which would or does operate as a fraud or deceit; a violation of any franchise registration or disclosure law or any rules or regulations promulgated thereunder; and, an attempt to compel franchisee to waive the statutory rights afforded to it under state franchise registration and disclosure laws.
Mis-selling would typically be relevant with regards to information about potential income or sales which the franchisee can expect, but also mis-selling the benefits of the franchise concept, the products and/or services offered could lead to mis-selling. Even though there are no mandatory disclosure requirements, if and when such information is provided and is deemed to be misleading or otherwise considered unlawful, the franchisee could claim that the franchise agreement is invalid or that the agreement should be terminated immediately due to breach of the agreement or the agreement being entered into on false premises. If relevant information, such as financial information, is not provided at all, this in turn could also lead to the agreement being deemed invalid. There are examples of this in case law, see the response to item 4 above.
Any disclaimer in the relevant documentation, such as the franchise agreement, any disclosure document or any sales material, would certainly be taken into consideration when considering if the misinformation should be considered as false premises, lead to an invalid agreement, or if the mis-selling constitutes a breach of the agreement.
If a misrepresentation is made by a franchisor to a franchisee which induces the franchisee to enter into a franchise agreement, suffering losses, the franchisee may, at certain conditions, base a claim for the annulment of the contract.
To limit such a risk, quite often franchisors include in the agreement clauses or disclaimers to limit their liability (particularly in respect of financial iformation or in respect of statements or promises made before the signing of the contract), but franchisor should consider that these clauses are not always enforceable (for example in case of gross negligence or fraud by the franchisor).
Where there has been an untrue statement of fact made by the franchisor, which induces the franchisee to enter into the franchise agreement and subsequently causes the franchisee to suffer loss then the franchisee may be able to claim for misrepresentation. Misrepresentation can be innocent, negligent or fraudulent. Depending on the type of misrepresentation, the franchisee can claim rescission of the franchise agreement with reimbursement of fees and other amounts paid, or damages.
It is common for franchise agreements to contain disclaimers and clauses that seek to limit liability for pre-contractual statements and misrepresentations. However, the courts have shown a willingness in the past to find ways around such clauses to protect franchisees where such clauses are considered to be unreasonable or unenforceable. Exclusion clauses that purport to exclude liability for fraudulent misrepresentation are always unenforceable.
The best protection for a franchisor to avoid misrepresentation claims is to ensure that its sales personnel are "on message" and do not make claims, in particular about the earning potential/profitability of the franchise, which are not based on facts.