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Who's to blame if a franchise goes wrong?

Lessons from Papa-John's v Doyley

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TLT LLP

How a franchisor might see it

You give them turnover projections based on industry figures

You give them material stating:• Figures given are projections, not guarantees• They should get professional advice

They sign an agreement which includes:• Nothing about projected or guaranteed turnover• A clear provision that they cannot rely on any statement that is not in the contract

You sell someone a franchise business

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TLT LLP

How a franchisee might see it

You buy a franchise

You are told franchises operate under a "tried and tested formula"

You are told franchises should typically generate a good revenue and profit

Your franchise is not as successful as the projections indicated, and your business folds

The agreement you signed says that the franchisor is not liable if you rely on the projections, and you think this is unfair

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TLT LLP

What actually happened

Papa John's sold Ms Doyley a

franchise (operating through

a company)

Papa John's sold Ms Doyley a

franchise (operating through

a company)

D had some, but not extensive,

business experience

D had some, but not extensive,

business experience

PJ gave D projections based on well-performing pizza stores (not just PJ stores)

PJ gave D projections based on well-performing pizza stores (not just PJ stores)

D did not take independent

financial advice or ask PJ whether the projections were based on actual PJ stores

D did not take independent

financial advice or ask PJ whether the projections were based on actual PJ stores

D never reached the projected

turnover or made any profit. The

company became insolvent.

D never reached the projected

turnover or made any profit. The

company became insolvent.

PJ sued D for lost profits

PJ sued D for lost profits

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How the judge actually saw it

D bought the franchise because PJ had misrepresented the turnover of its franchise stores:

• D could set aside the agreement

• D entitled to compensation from PJ

D bought the franchise because PJ had misrepresented the turnover of its franchise stores:

• D could set aside the agreement

• D entitled to compensation from PJ

Limitations of PJ's liability in the franchise agreement were not effective

Limitations of PJ's liability in the franchise agreement were not effective

PJ had a "duty of care" to D – D would reasonably be expected to rely on PJ's turnover figures without seeking independent advice

PJ had a "duty of care" to D – D would reasonably be expected to rely on PJ's turnover figures without seeking independent advice

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TLT LLP

PJ's projections were misrepresentations

• D bought the franchise because PJ misrepresented its turnover

• PJ never stated the figures were based on actual sales for existing franchises

BUT

• PJ's operating projections based on average net sales of £8k to £14k, but actual sales were £4k

• D did rely on these projections, and judge thought it was reasonable for her to do so

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TLT LLP

PJ still liable under agreement

• The no reliance clause did not relate to D:

• The judge found it related to D's company, not to D as individual

• The no reliance clause was unfair, and could be struck out:

• PJ presented agreement as non-negotiable

• PJ in a dominant bargaining position

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TLT LLP

PJ had duty of care to D

• PJ offered D guidance and advice

• PJ introduced D to the bank

• PJ knew D did not have experience of pizza business

• So, PJ should have assumed D would have relied on PJ's statements (including turnover) without seeking independent advice

What are the lessons?

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TLT LLP

Lessons for franchisors

Lessons for franchisors

Make sure any turnover or profit projections have an objective basis

Control what information you disclose to prospective franchisees

Do not assume franchisees will take independent advice

Do not expect your agreement will remove any liability for any statements you make selling a franchise

Check your agreement gives you the protection you can reasonably expect (especially for corporate franchisees)

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TLT LLP

Lessons for franchisees

Lessons for franchisees

You may still be able to get out of your franchise, even if:

• The agreement says you can't rely on statements not in the agreement

• You didn't take third-party advice

Don't rely on all judgements being so favourable to franchisees

• PJ's sales team made statements that had little basis in sales figures

• In this case PJ was suing D for lost profits