Who's to blame if a franchise goes wrong?

1. Who's to blame if a franchise goes wrong? Lessons from Papa-John's v Doyley

2. You sell someone a franchise business 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 How a franchisor might see it

3. 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 How a franchisee might see it

4. What actually happened Papa John's sold Ms Doyley a franchise (operating through a company) D had some, but not extensive, business experience 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 never reached the projected turnover or made any profit. The company became insolvent. PJ sued D for lost profits

5. 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 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

6. 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

7. 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

8. 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

9. What are the lessons?

10. 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)

11. 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