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Do waiver and exclusions clauses really protect the franchisor?

Citation: Papa John's GB Ltd v Elsada Doyley

Keywords: Franchisee’s counterclaim for misrepresentation & negligent misstatement – Representations as to average turnovers/sales or achievable turnovers/sales - And associated underlease – Underlessor surrendered headlease – Exercising of break clause in underlease by head lessor – Effect on franchise agreement – Construction of term of franchise agreement.

The Issue

When is an inaccurate projection and actionable misrepresentation?

Did a franchisor owe the principal/guarantor of a potential franchisee a duty of care in the provision of financial information prior to the contract?

Did non-reliance, entire agreement, waiver and exclusions clauses (which were in fairly standard terms) protect the franchisor from those claims.

The Facts

The Defendant entered a franchise agreement and underlease through a company and provided a personal guarantee for the company’s liabilities under both. The company went into liquidation. The franchisor sued the Defendant under the guarantee. She counterclaimed for damages on the basis she and the company entered the franchise agreement and underlease as a result of misrepresentation and/or negligent misstatement by the franchisor. The representations relied on related to turnover/sales projections and implied representations that they were (a) based on information in the franchisor’s possession as to turnover/sales achieved by existing franchises and (b) turnover levels a franchisee could achieve.

The franchisor provided projections and estimates as to turnover and costs. The initial turnover figures were referred to as “average weekly turnover” and were accompanied by a health warning that the franchisor could not guarantee the financial performance of any franchisee or store, performance was highly dependent on the franchisee’s ability and commitment and advising investments go up as well as down and independent advice should be sought. The franchisor  provided an electronic pro forma business plan for the potential franchisee to complete and use to raise funding. They subsequently provided updates that were populated with figures.

The franchise agreement had fairly standard entire agreement, non-reliance, exclusion and  waiver provisions.

The actual median turnover figures were very much lower than any of the figures provided. The basis for the figures provided was variously said to be based on industry figures, a competitors published figures, aspirational, illustrative or “dummy” figures.

The Judge found:-

(i) the projections were provided with a view to selling franchises to potential franchisees;

(ii) as the franchisor presented the information any prospective franchisee could think the average turnover figures were based on existing/historical figures and were achievable pending on success;

(iii) nothing in the franchisor’s information would disabuse a potential franchisee of such an understanding/interpretation;

(iv) the costs figures in the projections were based on existing/historical information but the turnover figures were not and the distinction was not apparent; and

(v) the figures presented were too high.

Accordingly he found the figures presented carried with them representations that amounted to misrepresentations.

Further he concluded the Claimant relied almost exclusively on the figures, the contractual provisions relied upon did not operate to exclude liability because as a matter of construction:-

(i) the entire agreement provision and the exclusion of pre-contractual statements covered alleged terms of the contract but did extend to representations;

(ii) the exclusions in the franchise agreement did not exclude liability to the guarantor; and

(iii) the waiver provision was a waiver by the franchisee not the guarantor.

Further he rejected an argument the guarantor was estopped from denying those various provisions extended to her in the absence of any evidence of relevant conduct by her or reliance by the franchisor.

The Judge concluded the exclusion clause related to misrepresentation was unenforceable having been in a standard non-negotiable agreement where the parties did not have equality of bargaining power. In the alternative the provisions were unenforceable by reason of a failure to satisfy the statutory reasonableness test.

The Judge concluded a duty of care was owed by the franchisor in the making of statements to the guarantor of a potential franchisee on two footings. First where there is an actionable misrepresentation there is a duty of care breached. Secondly, the franchisor specifically offered advice and assistance to this potential franchisee, held itself out as having specialist knowledge or skill and the guarantor was intimately involved in the negotiations so the relationship was proximate and the loss to her foreseeable. The “health warning”, whilst making it clear no guarantee as to the outcome was achievable, did not negate the fact advice and information was provided on the basis it could be relied upon. The scope of the duty of care encompassed the contribution and commitments made to enabling the franchise, not simply the entry into the guarantee.

The Judge also rejected 3 allegations of contributory negligence focused on inadequate due diligence.    

Held: (John Leighton-Williams QC sitting as a Deputy High Court Judge)

(1) The guarantor/principal had established she relied on the franchisor’s mispresentations in entering into the franchise agreement, underlease and making other investments in the franchise business.

(2) In the particular circumstance the franchisor also owed the principal/guarantor a duty of care.

(3) The franchisor could not rely on the entire agreement clause, non-reliance provision, waiver or exclusions to avoid liability to the guarantor.

Comment

This case is another demonstration that, whilst estimates and projections are not guarantees as to success, franchisees can sue on the franchisor who puts forward financial information designed to draw in potential franchisees without any proper foundation for the figures, does so at their peril.

The extensive non-negotiable standard terms designed to protect the franchisor cannot be viewed as a penetrable forcefield. Indeed when the courts conclude franchisors negligently or deliberately exaggerate for commercial advantage, there is a range of arguments open to them to ensure that protection is not available to the franchisee.