Fuel station franchisee wins compensation from Shell

 

 

 

 

Mark Lewis - Field Fisher Waterhouse

'franchisors should never provide forecasts to franchisees which cannot be supported'

A franchisee’s claim against Shell for misrepresentation of performance figures has been successfully upheld by the UK courts.

The case in question centred on former franchisee Stephen Fallon’s claim against Shell (UK) Ltd that profitability projections which had been presented by the franchisor for a site in Bolton, in the North West of England, were false.

The figures in question, which had been provided in May 1991 for a fuel station in Newbrooke had, according to the Judge, not only been made negligently, but also recklessly, without care as to whether they were true or false. Consequently, the court decided Mr Fallon had been induced to enter the franchise by fraudulent misrepresentation on Shell’s part.

The background to the case was that Shelsaroy Limited, a company controlled by Mr Fallon, had taken over the Newbrooke site as licensee in November 1990 and entered into a franchise agreement in May the following year. His proceedings against Shell began in 1994 and, in May 1997, the liquidator for Shelsaroy also assigned to Mr Fallon Shelsaroy’s causes of action.

Shell told Mr Fallon that the projections had been based on information which had been:

·        available to Shell through the operation of company-owned sites;

·        supplied to Shell by retailers advising Shell during development of the Shell franchise;

·        supplied by the franchisee or its predecessor at the Newbrooke site.

But Shell had predicted that the Newbrooke site would make nearly £27,000 in profit in the first year. Instead, it made a £6,000 loss. It had also forecast initial annual fuel volume sales worth £3 million, which were expected to increase to £3.35 million the second year, rising to £3.5 million in the third. Yet fuel volume sales for the site under its former proprietor in 1986 had in fact plummeted from £2.6 million to £2.4 million the following year – before rising again to just £2.6 million in 1988.

Projected shop sales figures also failed to reach the mark. These were expected, according to Shell, to reach £4,000 a week in the first year, rising to £4,950 a week after five years. Mr Fallon later discovered that these figures were double those which had actually been achieved in 1989.

Shell had regard to the 1989 figures alone and supplied no evidence to prove that it had taken any figures either before 1989 or from 1989 to May 1991 (the month in which Mr Fallon joined the franchise) into account when making its calculations. It had also failed to consider Shelsaroy’s own pre-franchise trading figures at the Newbrooke site between November 1990 and May 1991.

In court, neither witnesses nor documents were produced by Shell to justify what the Judge labelled its “absurdly optimistic” forecast and figures which he said had been “plucked from the air” in order to sell the franchise to Mr Fallon.

The Judge ruled in the complainant’s favour and Mr Fallon was entitled to recover the losses sustained by Shelsaroy as a result of entering into the franchise. After a further hearing, Shell was ordered to pay him £40,000 compensation and, in addition to the franchise fee (which it had already repaid), an extra £3,000 to cover loss of use of the franchisee fee until the fee had been refunded.

Mr Fallon had originally claimed £281,000, which was the difference between the deficit in Shelsaroy’s liquidation and its balance sheet value as at the date of the misrepresentation. However, this figure was found to include losses sustained at another Shelsaroy-owned site in Salford and losses after December 1991, by which date trading should have ceased anyway.

For further information on franchising law, please contact partner Mark Lewis at City law firm Field Fisher Waterhouse on 0207 861 4000 or by e-mail at: mal@ffwlaw.com