Australia: Could Pizza Hut force franchisees to sell pizzas at a loss? Or is that unconscionable conduct? Which case won?

Last Updated: 15 January 2018
Article by Anneka Frayne

Most Popular Article in Australia, January 2018

The Facts

Pizza franchisor implements nationwide price-cutting strategy

In 2014, the franchisor of the Pizza Hut system in Australia devised a new "value strategy", first to reduce the number of pizza ranges on offer from four to two and secondly, to reduce the price of one range from $9.95 to $4.95 and the other from $11.95 to $8.50. The strategy was devised in the wake of similar measures introduced by rival pizza chain, Dominos, and on the back of several years of declining sales at Pizza Hut.

The franchisor undertook some testing of the value strategy in the ACT market, with promising results, and determined to implement the strategy Australia-wide. Franchisees were required to adopt the strategy because the franchise agreements they had signed gave the franchisor the discretion to change the product range at their outlets and to set maximum prices.

Franchisees bring class action against pizza franchisor

Unfortunately, the value strategy was a failure. Some Pizza Hut franchisees saw their businesses collapse and others incurred substantial losses. Consequently, a group of 190 franchisees brought a class action against the franchisor in the Federal Court seeking to recover their losses.

The franchisees claimed that the franchisor had been negligent in its design of the value strategy, had breached the franchise agreement by requiring them to adopt it and had otherwise engaged in conduct that was unconscionable in breach of the Australian Consumer Law. The franchisor rejected these claims.

case a - The case for the franchisees

case b - The case for the franchisor

  • The aim of the franchise agreement is to generate profits, so when the franchisor sets a new pricing structure it must act reasonably and in good faith toward helping franchisees achieve that aim.
  • On the contrary, the value strategy ruined our profitability.
  • The evidence establishes a lack of any reasoned or considered case for implementation of the strategy. It was negligently designed, and no reasonable business person would have required us to implement it.
  • The value strategy was also unfair. The franchisor stood to gain far more from it than we ever did, while we took all the risk.
  • In setting the new prices, the franchisor did not properly consult with us and did not have proper regard to the impact the strategy would have on us.
  • We have suffered significant losses and should be compensated by the franchisor.
  • The franchise agreement requires that franchisees aim to develop their businesses and increase revenues. However, there is no term in the agreement – express or implied – that requires us to make decisions that produce a profit for each franchisee.
  • The profitability of individual franchisees is unknown to us and outside our control. Trying to set prices to ensure profits at every store would be commercially unworkable because every store is in a different position.
  • Uniform pricing is a key element of the national Pizza Hut system and the franchisees knew this when they signed the franchise agreement. It's not for the court to change the commercial bargain between the parties in the franchise agreement.
  • As participants in a competitive market we must be free to respond to price competition, which is a matter for business judgment. We did consult with franchisees and we exercised our judgment properly and in the genuine belief that the strategy would increase sales for both the franchisees and the overall business.
  • Any loss suffered by the franchisees is due to competition and is not our fault.

So, which case won?
Cast your judgment below to find out

Vote case A – the case for the franchisees
Vote case B – the case for the franchisor

Anneka Frayne
Business disputes and litigation
Stacks Law Firm

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.

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