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Non-reliance clauses in franchise agreements – Court of Appeal confirms they are subject to the "reasonable test"

26/03/2019
A "non-reliance" clause is a common feature in a franchise agreement. Such clauses contain an acknowledgment by a franchisee that they agree not to rely on any statements or representations which...

Introduction

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

A non-reliance clause forms part of the contractual "boilerplate". As such, it is often glossed over without enough due attention, both to the construction of the clause itself 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 held that a non-reliance clause in the lease was an attempt 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 upon pre-contractual statements are clauses that seek to exclude liability for misrepresentation and consequently are 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 in the contemplation of the parties when the contract 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.

The First Trustees Case

First Tower Trustees Ltd ("FTT") was the landlord and it leased warehouse premises to CDS (Superstore International) Ltd ("CDS") 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:

"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 they had used) which reported a health and safety risk. None of this information was given to CDS.

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 in the Court of Appeal.

The Court of Appeal held that Clause 5.8 was an attempt to exclude liability for misrepresentation and therefore was subject to s.3 of Misrepresentation Act 1967 and was required to satisfy the test of reasonableness under s.11(1) of the Unfair Contract Terms Act 1977 (UCTA).  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 the judge 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 a contract have 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 s.3 of Misrepresentation Act 1967 and, therefore, the reasonableness test in s.11 UCTA 1977.

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 failed to satisfy the reasonableness test in UCTA.  In this case, the court took into account

  • the inequality of bargaining power between the parties;

  • Papa Johns' insistence the agreement was non-negotiable; and

  • the standard boiler plate clauses in the franchise agreement had not been brought to the franchisee's attention.

This is in contrast to the case of Henry Boot v Foodco (a case that 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 comparison with Papa Johns.  The court held that the non-reliance clause in that case was enforceable. The court held that there was ‘no doubt’ that the clause was reasonable after considering the following factors under UCTA:

  • there was no substantial imbalance of bargaining power between the parties;

  • each of the tenants were advised by solicitors;

  • the non-reliance provision was open to negotiation; and

  • the clause permitted reliance by the tenants upon any replies given to them by Henry Boot’s solicitors.

Conclusion

In assessing the concept of reasonableness, it will be 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 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 and to ensure that the information provided to them is reliable about the franchise they are buying. It is in the franchisor's interests that a franchisee takes legal advice prior to signing the franchise agreement, and indeed in jurisdictions where franchising is regulated, such as Australia, this is a mandatory requirement.

Finally, although there is no legal requirement in the UK 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 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, although experience suggests that the form and extent of actual disclosure by BFA accredited franchisors varies significantly.

If you would like to discuss these issues, please contact Gordon Drakes (Partner) or Tim Rickard (Associate) in our Franchising and Licensing team.

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