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Franchise Litigation – Franchisee Problems

Franchise Litigation – Franchisee Problems

Franchising is no different from other businesses in many ways.  From time to time, people fall out and disputes arise.  However, there are some rather unique aspects to franchise litigation that have to be borne in mind.

Firstly, in most franchise disputes the starting point will be a lengthy franchise agreement which has been prepared by the franchisor.  Often, this will have been a “take it or leave it” proposition from the franchisor to the franchisee.  It is not unsurprising, then, that the franchise agreement will be heavily in the franchisor’s favour.  This means that the franchisee might find itself off in a worse position than the franchisor at the outset and specialist advice to a franchisee is crucial.  Franchise litigation should be considered a specialist area and franchisees need to be aware of the potential pitfalls and opportunities that exist to defeat what might otherwise be a well-worded, and often very lengthy, franchise agreement.

Areas of dispute n franchise litigation can be broad.  Franchisees often complain about their franchisors for such things as:

  • unrealistic profit projections;
  • a lack of support;
  • an unworkable franchise system;
  • refusal to renew the franchise agreement;
  • being required to pay excessive royalties and/or disputes as to their basis of calculation.

Franchisees often complain about things said or promised before the franchise agreement is entered into, especially profit projections.  The law books are littered with cases of this kind.  Often, franchise agreements contain what are called “Entire Agreement” clauses, which attempt to exclude any liability for the franchisor for anything said prior to entering into the franchise agreement.  Alternatively, or sometimes in addition, they contain a disclaimer provision, which attempts to do a similar thing.  These types of clause can be valid, if they are properly worded and do not attempt to exclude fraudulent representations by the franchisor.

In Papa John’s GB Limited -v- Doyley (2012), the franchisor provided the franchisee with two things (a) a very comprehensive franchise agreement and (b) an information pack for intending franchisees.  In the franchise agreement, there was the following clause:

“Papa John’s does not guarantee the financial performance of any franchisee or store. Financial success is highly dependent upon franchisee’s own hard work, skills, ability and commitment to the business. Neither Papa John’s nor any of its directors, employees or advisers can give any guarantees or warranties that the franchise will be successful or that you will achieve the potential income that we have identified. The return on your investment may go up as well as down. We strongly advise that you seek independent advice before committing to a Papa John’s franchise.”

In the information pack, the franchisor represented that it had set out profit projections based on the performance of other franchisees in the franchise network.  However, the judge found at trial that the projections were provided were in excess of the median average figures of the franchisees in the network.

The above wording was held to cover only contractual promises, and not pre-contractual statements.  Hence, the information pack profit projections amount to representations and these were not properly excluded by the clause.  The franchisor was held liable.

This is a demonstration of the court’s ability to circumvent the provisions in the franchise agreement which were intended to protect the franchisor.

Even if this type of clause does cover pre-contractual representations, it is possible that the it may still fail if the representations are fraudulent. In this sense, the term fraud if fairly wide and the scope is discussed in an old case of Derry -v- Peek (1889).  The court found that a statement would be fraudulent where it is untrue and a party has made it either (a) not believing in its truth, or (b) being made recklessly without regard for whether it is true of not.  A failure to exclude this type of representation is likely to invalidate an entire agreement or non-reliance clause.

It is probably true that most unrepresented parties looking at a franchise agreement might accept that the above statement in the agreement was sufficient to avoid Papa Johns having any liability.  It is therefore important, with any prospective franchise litigation, to ensure that a specialist in this area look at the matter carefully and advise fully before any decisions are made.  It is always sensible for a franchisee to avoid liaising with the franchisor regarding any franchise litigation until advice has been sought.

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