As a franchisor it is one thing to ensure that the information you provide in your Disclosure Document is accurate; but it's another to ensure that what you and your staff say in an effort to attract prospective franchisees does not in any way induce a prospective franchisee to enter into a franchise agreement especially when there are no reasonable grounds for saying what is said.

A successful appeal by franchisees against franchisor Billy Baxters (Franchising) Pty Ltd in the Victorian Supreme Court of Appeal has highlighted the risks to franchisors when negotiating and promoting Greenfield sites to prospective franchisees.

Judgement in the Victorian Supreme Court

The original judgement1 found in favour of the franchisor. Representations made by the franchisor's representative, Mr Mauviel, regarding the expected revenue to be had by the franchisee if they were to establish a brand new Billy Baxters restaurant at the Greenfield site at Glenelg were held not to be misleading and deceptive. This was despite the fact that Mr Mauviel was subsequently proven incorrect following the failed performance of the franchisee's business at the Greenfield site. The judge held that Mr Mauviel had reasonable grounds to make the representations that he did about the projections for the site being capable of covering both the exorbitant rent under the lease and of providing to the franchisee a tidy profit. It was also held that because Mr Mauviel provided the mandatory statements under the Franchising Code of Conduct to the franchisees warning them to obtain legal, business and accounting advice (the "Mandatory Statements"), this should have encouraged the franchisee to weigh up what was said by Mr Mauviel against the advice they should have sought, but didn't.

Appeal Decision

The decision on appeal overturned the original judgement and found in favour of the franchisee. This time, the representations made by Mr Mauviel as to the expected turnover to be had at the Greenfield Site were found to be misleading and deceptive and that there were no reasonable grounds for saying what he did to the franchisees. At the time of Mr Mauviel's representations, there was no available demographic analysis of the site which had been conducted by the franchisor and there was no comparable Billy Baxters business that could offer an appropriate comparison to the Billy Baxter restaurant to be established and operated at the Greenfield site. As to the Mandatory Statements that were provided to the franchisee, the judge noted that they were provided late in the negotiation process and that because of the timing, it was understandable that the franchisee took no notice of it.

Franchisors should take heed of a number of lessons from this case:

  • If you are in the business of selling franchises on Greenfield sites be very careful about what is said to prospective franchisees about the expected future potential of that site;
  • Be very careful about making any representation about potential income, profitability and turnover for Greenfield sites;
  • Make sure you train your staff accordingly about what they can and cannot say and be particularly careful about giving opinions about what you personally think the potential of a particular franchise could be. If there is no qualitative analysis or demographic reports to back up what you are about to say then don't say it; and
  • Rather than leaving it to the last minute when franchise documentation is issued to the prospective franchisee, emphasis the significance for franchisees to seek independent legal, business and accounting advice early on in the negotiation process. Rather than making 'recommendations' that advice be sought, Franchisors may wish to 'insist' in writing that such advice be obtained as soon as any enquiries are made by franchisees or written information has been provided to them.

If you promote Greenfield sites to prospective franchisees and would like advice on how to manage risk or if you just want to know more about your obligations under the Franchising Code of Conduct generally then please contact:

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.