Franchisor Small Claims Court Case

We had a day in court recently helping a previous client in a case where the franchisee felt that the franchisor had misrepresented the commercial potential of the franchise. This is not an uncommon gripe amongst franchisors in our experience. The case was heard behind closed doors in the small claims court as the sum the franchisee wished to be refunded amounted to just over £12,000 (even though the limit is supposed to be £10,000)! Anyway, after a day of debate our client won and the franchisee went home empty handed to pay their legal costs, the judge made some interesting points in his summing up as follows.

Mediation: The judge felt the case should have been dealt with through arbitration or mediation rather than come to court and this didn’t help the franchisees case since they applied for the case in the first place.

Proof: The judge dismissed a large number of points made by the franchisee which couldn’t be proved and were simply one persons word against the other. The franchisor was better prepared and were able to satisfy the judge on may points due to supporting evidence and expert witness statements from Andy Cheetham and others of the commercial potential of that franchise format.

Marketing Materials: The judge felt that it was acceptable that marketing and verbal points made in meetings would naturally be more “enthusiastic” than the legal contract and he was happy that the court differentiated between the two.

Due Diligence: The judge felt that the franchisee hadn’t done enough due diligence before signing the agreement and had they done so they would have been better informed about the commercial potential. The judge told the franchisee that it should always be accepted that there is a commercial risk attached to starting a business which the franchisee should have accepted.

The hearing lasted all day and cost all parties money but once again it was the franchisee who lost due to a number of factors and the reality of a commercial risk.

Andy Cheetham, MD of Lime Licensing Group said, “The lesson here is that franchisors should do what they can to point out the commercial reality of their business and document that to the franchisee, and franchisees should carry out adequate research into the model and their personal suitability to replicate it.”

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