FRANCHISING CASES

MISREPRESENTATION AS TO TRADING FIGURES

In Cut Price Deli Pty Ltd v Jacques 49 FCR 397, the franchisee was found to have been induced to enter into the Franchise Agreement based on certain predicted trading figures. Owing to a number of factors including the fact that the new shopping centre in which the business opened was not tenanted as expected, the figures were not achieved. 

The franchisor claimed that since the representation was based on the expectation that the centre would be fully let and the franchisee's knowledge of that, the franchisee could not continue to rely on the representation when it became apparent that the centre was poorly let. The franchisor further suggested that the franchisee's decision not to accept an offer by the franchisor to release the franchisee from the agreement and take over the business inferred an abandonment of any reliance by the franchisee on the representation. The Court did not accept these arguments and decided that the Franchisee was entitled to compensation of $210,000.

WILL THE FRANCHISOR’S PROMISES AMOUNT TO MISLEADING AND DECEPTIVE CONDUCT?

In Astram Financial Services Pty Ltd v Bank of Queensland Ltd[2010] FCA 101, a former franchisee of the Bank of Queensland (Bank), Astram Financial Services Pty Ltd (Astram) sought relief for alleged breaches of sections 52 and section 51AC of the Trade Practices Act (the Act).

The court in this instance followed the precedent in Butcher v Lachlan Elder Realty Pty Ltd and found that the question of whether conduct is misleading or deceptive or is likely to mislead or deceive is a question of fact.

In determining whether a contravention of section 52 has occurred, the task of the court was to examine the relevant course of conduct as a whole. The effect of any relevant statements or actions or any silence or inaction occurring in the context of a single course of conduct must be deduced from the whole course of conduct.

The court went on to say that the issue of whether the conduct of the Bank was misleading or deceptive is required to be determined by reference to what a reasonable person would have made of its actions. The court concluded that the information provided by the Bank to the franchisee clearly indicated that the responsibility for assessing the business risk involved in undertaking a franchise operation was the responsibility of Astram and its principals and rejected the arguments that the Bank’s conduct was misleading or deceptive.

This decision demonstrates the approach of the courts when assessing misleading and deceptive conduct claims while highlighting the onus the courts place on the franchisees’ due diligence when entering into franchise agreements and the courts’ desire to look at the parties’ conduct as a whole. 

DISTRIBUTION OR FRANCHISE?

In Australian Competition and Consumer Commission ("ACCC") v Kyloe Pty Ltd [2007] FCA 1522 (18 October 2007), the Federal Court examined an application by the ACCC which claimed that Kyloe contravened the Code by failing to provide disclosure documents to its sub-distributors. Kyloe was involved in a business distributing Polar Krush ice-drink machines and the re-sale of Polar Krush products through sub-distributors. Kyloe submitted that the relationships were dealership or distribution agreements and not franchises. The Court examined the definition of "franchise" under the Code which includes an agreement to carry on a business under a system or a marketing plan, associated with a trade mark, where the franchisee must make certain payments to the franchisor. Although Kyloe was ultimately successful in defending the ACCC's action, the case highlights the need to be extremely careful in establishing and documenting distribution arrangements in circumstances where the creation of a franchise relationship is not intended. This requires an understanding of the legal distinction between franchises and other business relationships. 

UNFAIR DISMISSAL CLAIMS WITHIN FRANCHISE NETWORKS

In Harry Fares v Ray White Dhillon Doncaster PR973866 [2006] AIRC 545 (5 September 2006), the Industrial Relations Commission dismissed an application for unfair dismissal by an employee of a Ray White real estate agency. The applicant's claim was based on the proposition that since the Ray White agency in Doncaster is part of a franchise network, which employs over 7000 employees nationally, the single franchisee should not enjoy the threshold of 100 employees or less currently prescribed by the Workplace Relations Act offering immunity from unfair dismissal claims.  

RESTRAINT FROM CARRYING ON BUSINESS AFTER EXPIRY OF THE FRANCHISE AGREEMENT

In Dial-an-Angel  Ors v Penchime Pty Ltd Anor [1998] WASC 180 (11 June 1998), the Supreme Court of New South Wales rejected an application by the franchisor to enforce a restraint of trade clause of the Franchise Agreement preventing the franchisee from carrying on a similar business in Perth for 3 years after the termination of the agreement. In this case, the franchisee decided not to renew the agreement, changed its name and continued to provide similar services to the franchised business. The Court ruled that this type of clause is generally not enforceable as being contrary to public policy. Thus the onus is on the covenantee (in this case the franchisor) to prove that the provision is reasonable for the protection of its legitimate interest.  The fact that the franchisee changed its business name was sufficient for the Court to decide that the intellectual property of the franchisor was not endangered.  

RESALE PRICE MAINTENANCE – s. 96(3)(b) of the Trade Practices Act (now Competition and Consumer Act 2010)

In Australian Competition Consumer Commission v Mayo International Pty Ltd Ors [1998] 808 FCA (10 July 1998), the Federal Court found that the supplier to a franchised chain of Price Attack retail outlets contravened the Trade Practices Act by engaging in conduct to maintain the retail price at which the products could be sold. The supplier provided the franchisees with a 15% discount on its products, but when it discovered that the products were offered at a lower price than its recommended retail price, the discount was no longer offered. The supplier was fined $10,000 for each of the franchisees that it had persuaded to increase prices. The director of the supplier who engineered the inducements was fined $20,000.  

MISLEADING AND DECEPTIVE CONDUCT / DELAY IN RESCISSION BY FRANCHISEE

Anema E Core Pty Ltd v Aromas Pty Ltd [1999] FCA 30 (22 January 1999). A husband and wife purchased a franchised café Aromas in 1995. They claimed successfully that the franchisor misrepresented trading figures prior to their purchase. The Federal Court found that the franchisees discovered the misrepresentation during the first week of trading, but chose not to raise the matter for a year. As a result of this delay, the Court awarded ‘primary entitlement' only, which was the difference between the actual purchase price of the business and the value of the business having consideration to the proper trading figures. The franchisees could not obtain any compensation for the time they traded with the knowledge of the misrepresentation as those trading losses followed from the franchisees' decision not to say anything to the franchisor.  

FRANCHISOR ACTING IN ITS INTEREST AT THE EXPENSE OF THE FRANCHISEE

In Montedeen Pty Ltd v Bamco Villa Pty Ltd [1999] VSCA 59 (18 May 1999), Delta Car and Truck Rental franchisor was found to have breached an implied term of the agreement by directing some of the calls within and around the franchisee's territory to its own branch located within 200 meters of the franchisee's territory. The franchisor was unsuccessful in establishing that it had acted in the overall interest of the network, although the Court of Appeal did agree that the franchisor's conduct was not intended to compete with the franchisee's business. 

Franchisor breaching a contract with franchisees giving the Advertising Fund ownership of its website Dymocks Holdings Pty Ltd and Ors v Top Ryde Bookesellers Pty Ltd and Ors [2000] NSWSC 390 (15 May 2000). 
In 1996, three Dymocks franchisees contributed small amounts of money for a subscription to the Dymocks website, supplemented by annual fees. In consideration for these payments, all profits from the website were to go to the Advertising Fund, which would operate the site in trust for all franchisees. In 1998, it was found that the Fund was not resourced to manage the site and the responsibility was proposed to be re-assigned back to the franchisor. 

The franchisees were asked to sign a deed confirming that any right they may have had in the site would be transferred to the franchisor. The franchisees refused to sign this deed and sought to establish an equity interest in the site proportional to their contributions. The estimated value of the Dymocks domain name and website was $50m. The Court found that the franchisees were entitled to compensation putting them in the position had the site continued to belong to the Advertising Fund between the date of termination of the agreement by Dymocks and the date of expiry of the existing individual franchise agreements (with no option to renew).  

UNCONSCIONABLE CONDUCT

In ACCC v Simply No-Knead (Franchising) Pty Ltd  [2000] FCA 1365, the ACCC applied to the Federal Court under the Trade Practices Act for declarations that the franchisor contravened the Act by:

Refusing to deliver products to some franchisees;

Deleting phone numbers of some franchisees from Telstra Directory without knowledge or authorisation of the franchisees;

Refusing to discuss certain matters of dispute with franchisees;

Omitting some franchisees from its marketing;

Selling products and services in the territories of franchisees; and

Refusing to provide disclosure documentation upon request.

The franchisor was wound up and the ACCC proceeded against a former director. The Court found that the franchisor hadutilised unfair tactics under s 51AC(3) of the Trade Practices Act by refusing to deliver certain products. Its refusal to discuss matters in dispute with the franchisees except on its own terms was found to be unfair, unreasonable and harsh having regard to the nature of the franchise relationship.   

IMPLIED TERM OF GOOD FAITH AND FAIR DEALING

The plaintiff in Far Horizons Pty Ltd v McDonald's Australia Ltd [2000] VSC 310 (18 August 2000) operated two McDonald's restaurants. The franchisee's relationship with the franchisor deteriorated over a number of years. Correspondence from the franchisor evidenced this and suggested that the franchisor ‘felt uneasy about growing…' with the franchisee. The franchisor commenced to develop a new store close to the franchisee's existing restaurant without first offering the site to the franchisee. 

The Court acknowledged the decision in Renard Constructions v Minister for Public Works (1992) 26 NSWLR 234 that there exists implied in every franchise agreement a mutual duty of good faith and fair dealing which may deem the use of power (even that which is constituted in a clause) "unfair" and beyond that of the agreement However, in this case, there was no breach of such a duty, nor any unconscionable conduct found. The Court did, however, quantify the loss to the franchisee of the loss of opportunity to acquire the new business as the value of that business.  

 

WHEN A LICENCE BECOMES A LEASE

Ireland v Subway Systems Australia Pty Ltd & Anor (Retail Tenancies) [2012] VCAT 1061 (20 July 2012)

The franchisee (Ireland) and the franchisor (Subway) disputed whether a lease or a licence existed between them. Subway held the Head Lease and attempted to grant a licence to the franchisee to use the premises to operate the Subway franchise. This is a very common set up for many franchise systems in Australia.

The parties were referred to as licensee and licensor in the Agreement. The Victorian Civil and Administrative Tribunal (‘VCAT’) reaffirmed the established legal principle that ‘labelling’ an agreement as a licence is not enough to ensure that it is in fact a licence rather than a lease.

The agreement must contain provisions that reflect licence or lease obligations. The requirements of a lease are very different to those of a licence, namely that a lease grants an exclusive proprietary interest to the lessee which allows significantly more rights than a licence. A licence merely gives a licensee permission to use the property for a specific purpose or purposes.

VCAT also held that the express declaration in the Agreement to the effect that Subway was not providing an exclusive proprietary interest in the premises to the franchisee was not enough to prevent the interest being created.

There were conflicting clauses throughout the Agreement. Some clauses would try to ensure a licence resulted however, many clauses were indicative of a lease. To illustrate, a clause detailed when the Agreement was terminated, Subway would re-possess the property without the risk of any trespass claim. This type of clause is not required in a licence agreement because the property is always the property of the licensor and no proprietary interest is ever granted to the licensee, as such there is no risk of trespass occurring.

Another conflicting clause was where it stated that the licensee was not to mortgage, assign, transfer or sublet the licence without the permission of the landlord. Once again these are actions that are only possible if a sub-lease had been granted.

Subway argued that the Head Lease did not allow the premises to be sub-let and a licence was the only option. VCAT held that this does not mean a sub-lease was not created, rather that it was a sub-lease which then breached the conditions of the Head Lease. There was also a covering letter attaching the Agreement that referred to it as a lease.

VCAT found a lease to be in existence as the overall circumstances and provisions of the Agreement meant that a lease was formed.

This case highlights a great threat to franchisors who currently hold a head lease with inadequately drafted licence agreements. Franchisors should obtain advice in relation to any new licence agreements they create to ensure that they are consistent with the purpose and intention of the parties.