The concept of misleading and deceptive conduct was recently
dealt with by the Federal Magistrates' Court (the Court) in the
case of Van Camp v Muffin Break.
The franchisee in this case, Van Camp, purchased a Muffin Break
outlet at the Forest Hill Chase Shopping Centre. It was the first
outlet at the particular shopping centre. Van Camp alleged that
Muffin Break engaged in misleading and deceptive conduct (contrary
to section 52 of the Trade Practices Act). Van Camp argued that
Muffin Break made a representation that the Forest Hill Chase
Shopping Centre site was a suitable site for the establishment of a
franchise outlet (which it wasn't) and made further
representations regarding the projected sales Van Camp could expect
over the initial months of trading (which did not eventuate).
In the franchise documentation executed by Van Camp, there were
numerous acknowledgments that the documents were the full
embodiment of the agreement and no representations were relied
The Court found that the nature of the representations, when
taken as a whole, were capable of distorting Van Camp's
judgment. The representations distracted Van Camp (as they would
any reasonable person in the circumstances) from the significance
of the acknowledgements which were contained in the franchise
agreement he signed. The documents were signed in rushed
circumstances and this made them of limited value to the franchisor
when using them to rebut their general contention that the
representations alleged were never made.
The Court established that Muffin Break, through its employee,
Brusch, engaged in misleading and deceptive conduct when it made
representations about the projected sales figures. The Court
commented that it was reasonable for a prospective franchisee to
rely on a representation of this kind when deciding whether or not
to enter an agreement to purchase a franchise. It also considered
the fact that there were no reasonable grounds for making the
representations, because firstly, Muffin Break denied they were
made and secondly the subsequent financial performance of the
Forest Hill Chase site suggested the representations were not
reasonable. Additionally, it was noted that the site could not be
reasonably represented as suitable because there was no proper
process where the site was evaluated.
Van Camp was entitled to rescind the franchise agreement and
licence agreement (from the time when the agreements were entered
into with the respondent). Due to representations made by the
franchisor's employee, the franchise agreement and licence
agreement were void and the franchisee was entitled to act as if he
had never signed them.
What this means for franchisors
Franchisors should not rush potential franchisees into signing
Staff should be appropriately trained to avoid making
representations, or to only make authorised representations.
Franchisors should not represent a site as suitable if they
have not properly evaluated the site.
Franchisors cannot always rely on the existence of an
acknowledgement clause in the franchise agreement, which states
that neither party has relied on representations outside the
document, to protect themselves from misleading and deceptive
Recommendations for Franchisors
Establish a suitable process to induct franchisees into the
system which includes reasonable time for the execution of
Conduct training of existing staff and incorporate into the
induction of new staff information about Trade Practices
obligations to assist staff to recognise, understand the importance
of and to identify issues that arise in relation to
Keep information which supports any representations made to
franchisees and confirm in writing the substance of meetings held
Include an acknowledgement which is given by the franchisee as
part of a separate document, incorporating questions so that
franchisees must actively turn their mind to whether
representations were made and positively state that they were
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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