The case of Trans-It Freight Pty Ltd v Billy Baxters
(Franchise) Pty Ltd  VCA 71 involves the Billy
Baxters' franchisor and its former Glenelg franchisee. The
franchisee had terminated their franchise agreement after the
business made losses and it was unable to pay the franchise fees.
The franchisor sued the franchisee, seeking recovery of unpaid
royalties and advertising fees under the franchise agreement.
In the first instance, the Supreme Court of Victoria found
against the franchisee who had admitted that $250,000 worth of fees
were unpaid. However, the franchisee had also issued a
counter-claim, seeking compensation for its losses suggesting that
the franchisor's representative had made misleading and
deceptive statements before the franchisee signed up to the lease
and franchise agreement.
The question to the Court was whether the statements of
projected turnover and reasonableness of rent made by the
franchisor's representative were misleading and deceptive under
the Trade Practices Act 1974. The franchisee stated that the
franchisor's representative had told it the anticipated
turnover for the business was $1.3 million and that this would
allow the franchisee to pay the rent and return a profit. In
finding against the franchisee, the Court found that the
franchisor's representative had in fact provided a spread sheet
template to the franchisees which allowed the franchisee to play
around with figures for the business and determine viability
themselves. The franchisee (who was an experienced franchisee
itself) was also advised to enter its own information into the
spread sheet and seek independent advice. The franchisee ignored
The Court found that the $1.3 million turnover claim was false.
However, it was made on reasonable grounds so there had not been a
breach by the franchisor.
On Appeal, a critical consideration for the Court was the set
rent for the premises of $160,000 per annum which had been agreed
between the franchisor and the landlord. The Court of Appeal found
that the franchisor's representative would have told the
franchisees that the ideal maximum rental was 15% of the turnover
for the business. The Court also found that the figure of $1.3
million was provided without reasonable grounds and that the
turnover figure's only connection to the rent figure was that
the business would need to make that amount of turnover as a
minimum to make the rent affordable. The Court held that
franchisor's representative had no foundation on which to base
the representation that the franchisee could expect the turnover of
the business would be $1.3 million and there was no evidence of any
analysis that could back up that projection.
In a unanimous decision, the Court of Appeal agreed that the
franchisor's representative's comments were not made on
reasonable grounds and the decision of the Supreme Court was
overturned with the franchisor ordered to pay the franchisees
damages of $1.22 million.
Lessons for Franchisors
Franchisors should make sure that they closely monitor and
oversee the actions of their representatives in dealing with
prospective franchisees. It is important that representatives are
educated on the kinds of statements that should not be made to
prospective franchisees and to be clear at all times that
franchisees should conduct their own due diligence and draw their
own conclusion from their research. Any statements made about
turnover and profitability when franchisees are considering the
business are likely to become an issue if the business subsequently
Franchisors should also review their documents and procedures
surrounding site selection.
Prospective franchisees should also be required to seek
independent legal and financial advice before proceeding to enter
into a franchise agreement.
Prospective franchisees should also be encouraged to undertake
their own demographic, analysis and feasibility studies for the
site they are considering.
Careful attention should also be paid to the information
provided in the disclosure document. However, the greatest risk
lies in the statements made by representatives of a franchisor in
their attempt to make the business seem more attractive to
prospective franchisees. Discussions around figures and potential
or expected income for a particular site need to be approached very
carefully to ensure franchisees are not entering into franchise
agreements on any false or misleading information.
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.Madgwicks is a member
of Meritas, one of the world's largest law firm
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