A recent decision of the High Court of New Zealand – TFAC Ltd v David (2008) 8 NZBLC 102, 179 – provides a salutary reminder to franchisors and prospective franchisees that a proven franchise concept in a home market does not necessarily equate to a proven concept in an overseas market. To so represent will constitute misleading conduct. The case also cautions that franchisors will not necessarily get away with such conduct by requiring prospective franchisees to seek their own independent advice.
Misleading conduct
The defendants, who had acquired the New Zealand master franchise rights to James Home Services, a successful Australian franchise brand, were successfully sued by a regional master franchisee to whom rights to grant sub-franchises to contractors had been granted. The action was in respect of representations that "the James formula is proven in the marketplace where it counts" and was a "proven system for success". These representations were held to lack basis in New Zealand and constitute misleading conduct. Whereas in Australia the organisation had reached maturity, New Zealand was at such an early stage of development that there could be no reasonable assurance of the prospects. Baragwanath J held that while in Australia the James' Home Services brand and its product were so familiar to the public for there to be a demand for
"....the truth is of virtually unrelieved failure of the New Zealand operation. Yet [the defendants] encouraged [the plaintiffs] to base his decision on Australian examples when she knew that there was no basis for representing that it formed any basis for an assertion that the plaintiffs could base their plan for a New Zealand operation upon it".
The effect of disclaimers
The franchise documentation contained disclaimers, signed acknowledgments and other clauses imposing on the plaintiffs' obligations of due diligence and enquiry. The plaintiffs obtained independent legal and accounting advice and the solicitor and accountant both signed "due diligence certificates" to the effect that the outcome and ramifications of the transaction documents had been explained to and understood by the plaintiffs. Independent business advice was not sought – the plaintiffs claiming they accepted what they had been told by the defendants.
The Court held that the disclaimer requiring persons using the information provided to carry out their own due diligence and to verify to their satisfaction all figures and content was not effective:
"it was James, not the plaintiffs, who possessed the experience [and] given the pitch to that point it would be unreasonable to treat that document ... as nullifying the effect of that pitch".
The Court also held that the requirement to obtain legal, accounting and business advice did not protect the master franchisee:
"The defendants' submission that the Regional Master franchise certificate is fatal to the plaintiffs' claim, because it is a clear acknowledgment by the plaintiffs that the defendants were not qualified to evaluate the plaintiffs' business plan or the value of the franchise that they were purchasing, leaves out of account the lengthy prior course of dealing between the parties in the course of which the defendants progressively secured the confidence of [the regional franchisee]...Neither [the regional franchisee] nor his solicitor or accountant nor, for that matter, business advisor could reasonably be expected to challenge what was being said by these representatives of [the master franchisee]".
Implications
Although this decision is not binding in Australia the result would probably be the same. The case is a strong reminder of the power of the misleading or deceptive conduct action. A defendant who engages in misleading conduct cannot rely upon the failure of the plaintiffs to find it out by stipulating that they employ a lawyer, an accountant and a business adviser to audit what it has asserted.
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.
