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
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
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
"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
The Court also held that the requirement to obtain legal,
accounting and business advice did not protect the master
"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]".
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
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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On 12th November 2016, new laws will commence to protect small businesses from unfair terms in standard form contracts.
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