This article appears in the January/February 2014 issue of Business Franchise Australia & New Zealand
There are many decisions that come into play when considering whether or not to purchase a franchise. The principal ones are, of course, which franchise, location and how much to pay.
Rarely however does a prospective franchisee stop to consider the importance of what is being represented to it during the initial negotiation process in making those decisions.
Interestingly, one of the main contributing factors to disputes between franchisors and franchisees relate to the representations and promises that are made prior to or during the purchase of the franchise itself.
• The ACCC received 740 complaints about or from businesses involved in franchising in the last financial year, and amongst the most common complaints were the failure of franchisors to provide a disclosure document, and false or misleading representations by franchisors, especially in relation to earnings forecasts.
• In 2012 Billy Baxters was fined $1.22 million after the Victorian Court of Appeal found that its turnover estimates were not based on reasonable grounds. The fine was one of the factors which saw the demise of the franchise.
• In January 2013, there was much publicity surrounding three displeased franchisees of Pie Face who threatened to commence proceedings against the franchisor claiming they were misled over the profits they would make and the costs they would incur when they first purchased the franchises, further stating that during the first few months of trading, the trading figures were completely different to those initially predicted by the franchisor when selling the franchise to them.
The franchisor has rejected the claims and denied providing any misleading or deceptive cost information. There has been no report of a resolution to the dispute as yet.
The high number of disputes is largely because prospective franchisees often do not make a clear record of these representations and document them in a way that will be binding on the franchisor when deciding whether or not to enter into a franchise.
Here, we take a look at a recent example of such disputes and consider whether the proposed changes to the Franchising Code of Conduct will go far enough to assist in reducing the number of disputes that arise between franchisees and franchisors with respect to pre contractual representations, and whether they will assist with the dispute resolution process.
In Astram Financial Services v Bank of Queensland  FCA 1010, Astram entered into a franchising agreement with the Bank of Queensland (“BoQ”).
After the franchise failed, Astram alleged that the failure was due to BoQ misrepresenting both the targets stated in a business plan and the level of support the BoQ was to provide to it. Astram argued that it never achieved the targets BoQ represented it would and insisted that it never would have entered into the agreement if it had known that the prospects of success stated by BoQ were not achievable.
After an unsuccessful mediation, Astram commenced proceedings in the Federal Court of Australia.
In finding in favour of BoQ, the Court found that the problem with Astram’s case was that it was relying upon verbal “assurances” given by BoQ which were directly contradicted by express contractual terms followed by written statements of the Bank’s position. The contractual terms and written statements were accepted by Astram and endorsed as understood by its principals. Thus, it followed, that introductory discussions were just that, and could not be relied upon in circumstances where the actual terms recorded in writing were inconsistent with those discussions.
Despite Astram’s failed attempt, it has been reported that a group of ten former BOQ franchisees may be seeking damages in the NSW Supreme court claiming BOQ made representations over revenue and new business that did not eventuate. It remains to be seen as to whether they will succeed.
No doubt much will turn on whether the franchisees have a written record of the representations, and have not signed documents containing different statements, or acknowledgments that they did not rely on any information provided by the franchisor which was not contained in the franchise agreement and formal disclosure document.
The Franchising Code of Conduct (“the Code”) is a mandatory industry code under Part IVB of the Competition and Consumer Act 2010 (CCA).
The Code prescribes certain documents that must be given to prospective franchisees, the contents of those documents, and stipulates provisions that must and must not be included in franchise agreements.
Clause 26 of the Code sets out the manner in which franchising disputes are to be resolved outside litigation. In brief, the Code states that if the parties cannot reach an agreement and resolve a dispute within 3 weeks (clause 6(3)), then the parties are to attend mediation.
Mediation is a cost-effective way to resolve franchising disputes without commencing expensive and lengthy legal action.
The parties can either agree to appoint a mediator, or contact the Office of the Franchising Mediation Advisor (OFMA), which provides a free mediation service. Mediation has proven to be effective in resolving franchising disputes.
Amendments to the Code
On 4 January 2013, the Commonwealth government announced a review of the Code. The review was undertaking by Mr Alan Wein.
On 24 July 2013, the government formally responded to Mr Wein’s recommendations, accepting the majority, including an obligation on franchisees and franchisors to act in good faith.
Other proposed amendments to the Code include imposing an obligation on franchisors to furnish prospective franchisees with a short form disclosure document and a requirement that franchisors provide prospective franchisees with a short summary of the matters and key risks they should be aware of when considering purchasing the franchise.
This is an attempt to address the difficulties franchisees face when confronted with a large amount of detailed information in different forms, which was perhaps one cause of the problems which beset Astram in the case discussed above.
Mr Wein also recommended amendments to the dispute resolution clauses within the Code, which include that franchisors should not require franchisees to pay their legal costs of a dispute, unless a court orders otherwise, and a limit on the ability for franchisors to require franchisees to litigate outside the jurisdiction in which the franchisee operates.
While the proposed amendments to the Code will be beneficial for franchisees in particular, and may well have the effect of reducing the number of disputes arising between franchisees and franchisors, it is important for franchisees to take care at the outset to identify important representations and document them in a way that will be binding on the franchisor. One way to achieve this is to obtain legal and financial advice prior to entering into a franchise agreement, so as to ensure as far as possible that the franchisee enters the agreement with a complete picture as to what can, and cannot be relied upon.
Bartier Perry is an established and respected Sydney law firm, providing expert legal services for over 70 years. They work with clients in franchising and a range of other industry sectors.
Carrie Peterson is a Senior Associate with Bartier Perry specialising in commercial litigation and dispute resolution. Carrie is also an Associate Member of the Insolvency Practitioners of Australia.
Phone: 02 8281 7922