Who s to blame if a franchise goes wrong
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Who's to blame if a franchise goes wrong? PowerPoint PPT Presentation


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

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Who's to blame if a franchise goes wrong?

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Who s to blame if a franchise goes wrong

Who's to blame if a franchise goes wrong?

Lessons from Papa-John's v Doyley


How a franchisor might see it

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


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

How a franchisee might see it


What actually happened

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


How the judge actually saw it

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


Pj s projections were misrepresentations

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


Pj still liable under agreement

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


Pj had duty of care to d

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

What are the lessons?


Lessons for franchisors

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)


Lessons for franchisees

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


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