Insight

Food for Thought: Misleading Conduct in the Franchise Space

Some franchisors do not fully appreciate the importance of record-keeping during the negotiation stage, but as the Guirguis family discovered, this might be the most crucial step until opening day.

Franchise Agreements and the Importance of Co
Alicia Hill

Alicia Hill

June 26, 2019 01:39 PM

Some franchisors do not fully appreciate the importance of record-keeping during the negotiation stage. Let the following story serve as a manifesto on the importance of paying attention to all the promises made during negotiation.

In March 2012, Mr. and Mrs. Guirguis entered into a franchise agreement to operate a Michel’s Patisserie business in Townsville. Before entering the agreement, a Deed of Prior Representations and Questionnaire was also signed, setting out any representations relied on by the franchisee in entering into the franchise agreement. Proceedings were later brought seeking orders under the Australian Consumer Law for the franchise agreement to be set aside. Mr. and Mrs. Guirguis claimed Retail Food Group (RFG) engaged in misleading or deceptive conduct by way of misrepresentations about the quality and frequency of product deliveries from Brisbane.

Procedural History

In April 2016, the Brisbane District Court dismissed the Guirguis’ claims. The trial judge held there was a failure to establish the requisite element of reliance to bring a misleading or deceptive conduct claim. Significant weight was afforded to answers provided in the Questionnaire to find that Guirguis’ had not relied on representations made by RFG when entering the Franchise Agreement.

In May 2017, the Court of Appeal allowed an appeal setting aside the District Court judgment and subsequently ordered a re-trial over the misleading or deceptive conduct claims. The Court held that the trial judge did not decide on whether the pleaded representations had been made or whether they indeed amounted to misleading or deceptive conduct. Instead, the claim was rejected solely upon the conclusion that reliance had not been made out. This was seen as a departure from conventional methodology, and the Court was prepared to hold this approach as an error in the application of the law.

Re-Trial

The re-trial first turned to consider the oral and written representations made by RFG. Four alleged misrepresentations were made:

  • That there would be no issue in delivering stock between Brisbane and Townsville.
  • Deliveries would take place at least once per week.
  • A full range of special order cakes would be available.
  • Products would be snap frozen, delivered in freezer trucks and would be of undiminished quality when thawed and ultimately sold.

Rosengren DCJ was satisfied that words giving effect to the representations were used as they were clearly matters that would have been relevant to the decision as to whether to enter the Franchise Agreement. The Court also considered whether there was a failure by RFG to disclose that franchises were experiencing delivery delays because of uncertain supplies from its baked goods supplier, Dyson, where there was a reasonable expectation that such information would be disclosed.

Misleading Conduct

In assessing whether the conduct was misleading, the Court saw the ultimate issue as to whether the representations led to or were likely to lead the Guirguis’ into error. The core consideration was the reasonableness of the representations. After assessing the nature of the representation, the Court found it decisive that RFG could tender no evidence that they had previously delivered their products to locations as remote as Townsville. The Court saw this as “essentially uncharted territory” given the next most remote location was some 700 kilometers closer to Brisbane. On this basis, Rosengren DCJ was prepared to class the representations as misleading or deceptive.

Relevance of Non-Disclosures

The Court then turned to the issue of non-disclosure that Michel’s Patisserie franchises were experiencing delivery delays because of uncertain supplies from Dyson. The Guirguis’ relied upon emails sent from the National Operations Manager of Michel’s Patisserie to all franchisees (except the Guirguis’) outlining issues with the financial viability of Dyson. The email warned of potential interruptions to supply or a possible change of business model that could affect the freshness of stock.

It was held that there was a real expectation that RFG would have disclosed this information. Rosengren DCJ was satisfied that RFG comprehended a real uncertainty regarding the supply of products from Brisbane. This comprehension, in turn, gave rise to a reasonable expectation of disclosure. Its relevance was especially so given the Guirguis’ had no previous franchise experience and had made express enquiries into the achievability of stock delivery between Brisbane and Townsville during negotiations.

Such a failure to disclose the changed position while negotiating the terms of the Franchise Agreements amounted to conduct that led or was likely to lead the Guirguis’ into error.

Reliance

The Court finally considered whether the misleading or deceptive conduct persuaded the Guirguis’ into entering the Franchise Agreement. In establishing reliance, the Court again found it compelling that Mr. Guirguis had expressed concerns regarding the reliable and frequent supply of products to Townsville. This was an enquiry to which RFG assured the Guirguis’ there would be no issues.

The Court dismissed an argument proposed by RFG that positive action performed by the Guirguis’– including enquires into acquiring other like franchises and querying a Coles supermarket about their process for freezing baked goods – did not negate a finding that the plaintiff relied on RFG’s representations. The actions instead served to confirm the value the Guirguis’ attached to the representations when entering into their Franchise Agreement.

Accordingly, the Court was prepared to find in favor of the Guirguis’ and dismiss the counter-claim brought by RFG.

Lessons to Learn

The case serves as a reminder for franchisees to ensure that all representations and promises made during the course of negotiations are accurately recorded if they want to rely on them at a later point in time. It is also crucial that franchisors consider the accuracy of representations made, especially in novel contexts, and assess the merit in disclosing relevant business materials that could impact the decision of potential franchisees to enter into franchise agreements.

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If you have any concerns about your franchise documents or your responsibilities as a franchisor, MST Lawyers has an experienced team of franchising lawyers who can advise you about obligations such as disclosure requirements, misleading or deceptive representations and good faith. For more information, please contact our Franchising team by email or call +61 3 8540 0200.

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