Australia: But you said! - Considering pre-contractual representations

Representations made to a franchisee prior to entering into a franchise agreement should not be taken lightly. Often, it is these representations that form the basis of claims made by franchisees against a franchisor if the franchise business fails. In the circumstances, franchisors ought to exercise care in making any pre-contractual representations to ensure that the representations are accurate. Care also ought to be taken in ensuring that franchisors do not mislead or deceive franchisees by omitting to reveal to them the true state of affairs of the franchise network prior to the franchise agreement being signed.

The recent decision in Guirguis Pty Ltd & Ors v Michel's Patisserie System Pty Ltd & Ors [2016] QDC 117 provides a good example of how diligent risk management by a franchisor prior to entry into a franchise agreement can assist in defeating claims made by a franchisee down the track.

Background

On 26 March 2012, the plaintiffs, Guirguis Pty Ltd, as the franchisee, and Mr and Mrs Guirguis as guarantors, entered into a franchise agreement with the principal defendant, the franchisor, concerning the operation of a Michel's Patisserie outlet in a shopping centre in Townsville.

Mr Guirguis gave evidence that he conducted a lot of research and spoke to a large number of stakeholders before making the decision to enter into the franchise agreement.

Evidence was also led at trial that, prior to entry into the franchise agreement, the plaintiffs signed a Deed of Prior Representations and Questionnaire. This document asked the plaintiffs to write down full details of any verbal or written statements, representations or warranties which may have been made to them prior to the entry into the franchise agreement and which influenced their decision to enter into the agreement.

Other than some representations regarding lease terms, skills and ongoing support, the plaintiffs did not list any other representations said to have influenced their decision to enter into the franchise agreement. This was despite the franchisor sending a follow up letter after the franchise agreement had been entered into, querying whether there were any other representations on which the plaintiffs had relied.

On 18 July 2013, the plaintiffs abandoned the franchise business and sought to terminate the franchise agreement on 22 July 2013. On 25 July 2016, the franchisor issued its own termination notice based on the plaintiffs' abandonment of the franchise business.

The plaintiffs subsequently brought proceedings against the franchisor on the following bases:

  1. that they would not have entered into the franchise agreement but for certain representations made by the franchisor to the plaintiffs prior to the entry into the franchise agreement concerning regular deliveries from Brisbane to Townsville of snap- frozen products;
  2. that the franchisor failed to disclose to the plaintiffs a number of matters concerning uncertain future supplies from Dysons (a Brisbane bakery used as a supplier of products); and
  3. breach of contract.

The franchisor counterclaimed against the plaintiffs for breach of the franchise agreement (and related occupancy licence) and sought payment of royalties, rent and outgoings, lease surrender costs and fees for removal of plant and equipment. Mr and Mrs Guirguis were included in the counterclaim as guarantors of the franchisee's obligations under the franchise agreement.

The plaintiffs' claim

Misrepresentation

In order to succeed in a claim for misrepresentation, the plaintiffs had to show that:

  1. the alleged misrepresentation was made;
  2. the plaintiffs relied on the misrepresentation; and
  3. suffered loss and damage as a consequence.

The plaintiffs' claim for misrepresentation failed. The Court held that the plaintiffs did not rely on the representation by the franchisor concerning the regular deliveries from Brisbane to Townsville of snap- frozen products. Central to the Court's decision was the Deed of Prior Representations and Questionnaire signed by the plaintiffs. Despite a number of opportunities being provided to them, the plaintiffs did not identify within the Deed the alleged representation as one which influenced their decision to enter into the franchise agreement. This, coupled with Mr Guirguis' own evidence at trial that he took a lot of care to ensure that what he writes down is completely accurate, convinced the Court that no reliance had been placed on the above mentioned representation even if the representation was made (an issue which the judgement did not address in detail).

The Court also dismissed the plaintiffs' argument that they would not have entered into the franchise agreement if they had known about certain matters concerning the franchisor's supply chain arrangements. The Court found that some of the matters the plaintiffs referred to were not within the franchisor's knowledge at the time the franchise agreement was entered into. Others had no basis in circumstances where, at the time, there were no acute problems with the supply of products to Townsville.

Negligent misstatement and breach of contract

The Court held that a claim based on negligent misstatement or breach of contract was unsustainable. The franchise agreement contained clauses which in essence prevented the plaintiffs from recovering any loss or damage allegedly suffered by them as a consequence of any failure by a manufacturer, producer or supplier approved by the franchisor or in connection with the supply or non-supply of products. Therefore, even if a negligent misstatement or a breach of contract claim could be made out, the Court held that the franchise agreement precluded any monetary recovery. Interestingly, it appears that the franchisee did not seek to challenge these clauses, or even raise the issue as to whether they could be considered general releases which are prohibited by the Franchising Code of Conduct.

The franchisor's counterclaim

The Court found for the franchisor on the counterclaim. The plaintiffs did abandon the franchise business. Their purported termination of the franchise agreement was unlawful as it did not comply with the terms of the franchise agreement. The franchisor was awarded $650,552.24 in damages.

Practical implications

There are a number of lessons that franchisors can take away from the Guirguis case. These include:

  1. ensuring that any representations made to franchisees are accurate;
  2. including appropriate warranties and disclaimers in franchise documentation to minimise risk and to displace reliance on any representations that may have been made;
  3. actively encouraging franchisees to undertake extensive research and to seek independent financial and legal advice prior to entry into the franchise agreement; and
  4. considering the use of prior representations statements/deeds that give the franchisee the opportunity to specify any representations that have been made that need to be addressed.

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