The case of Brotherson v Hursle Pty Ltd [2013] QDC 257  is a prime example of why franchisors should always be careful about anything they say to a potential franchisee during pre-contractual negotiations to avoid acting in a misleading and deceptive manner.

Background

In mid 2010, the Brothersons (the Franchisees) entered into a franchise agreement with Hursle Pty Ltd (the Franchisors) for an Espresso To Go franchise business. The Espresso To Go business model was based on making coffee available to businesses where coffee was not readily available via a van with espresso coffee making equipment. Prior to entering into the Franchise Agreement, the Franchisees and Franchisor entered into a number of rounds of pre-contractual negotiations whereby the Franchisor gave the following representations to the Franchisee:

  • they would easily be able to sell at least 150 cups of coffee a day;
  • existing franchises were averaging 160 cups of coffee a day; and
  • that a “feasibility study” had been conducted on the proposed territory of Lismore and that its result was positive.

According to the Franchisee, the last representation was the most relevant. Here the Franchisees stated that the Franchisor represented to them that territory was “so good he could put three vans into the territory”.

The law

At the time, the Franchisee brought the claim as a breach of the then relevant Trade Practices Act (now the Consumer Law, which according to our Franchise Lawyers is for all relevant purposes the same as the Trade Practices Act) based on the argument that the representations were misleading and/ or deceptive. Misleading and/ or deceptive conduct occurs when representations are made, and those representations induced a party to enter in a contract and the representations were false and/ or there was no reasonable basis to make those representations.

The trial

At the very first, the Franchisor sought to rely on clauses which excluded the Franchisor’s liability in respect of the representations however the McGill SC DCJ held that the clauses could not waive any statutory obligation. Having established that the waiver clauses were ineffective, the judge then had to determine whether the representations were made, whether it induced the Franchisees and whether the representations were false and/ or there was no reasonable basis.

Here the facts showed:

  • the representations were made verbally and in writing;
  • the representations did induce the Franchisees to enter into the franchise agreement. The Franchisees had wanted to ensure that there was a certain number of cups of coffee being sold in order to ensure the franchise had sufficient revenue to exceed or at least match the income they were receiving at the time; and
  • there was no reasonable basis to make the representations.

The Court found that the “feasibility study” was nothing like that which was represented to the Franchisee. It turned out that the Franchisor had simply conducted a Google search on the area to establish the number of businesses there were in the area and assumed that every 350 businesses could support a franchise. There was simply reasonable basis (at least on the information that was available to the Franchisor at the time) upon which the Franchisor could have reasonably thought the Franchisee would sell at least 150 cups of coffee a day and that the Franchisor’s franchisee’s were averaging 160 cups of coffee a day.

Application

Since the introduction of the new Franchising Code of Conduct in 1 January 2015, Franchisors are now prevented from being able to rely on any clause that seeks to waive representations that had been made to a franchisee during pre-contractual negotiations. Although in this case, the clause was held to be not applicable in any case (the Franchisee was arguing misleading and deceptive conduct which is a statutory obligation and cannot be waived), it still illustrates, the importance of Franchisors making sure that they do not give any representations which are unreasonable or cannot be fulfilled.

Conclusion

To ensure this does not occur, our Franchise Lawyers recommend Franchisors include a “warranties schedule” into the franchise agreement and to go through each warranty carefully before signing off on the franchise agreement.

Masao Watanabe

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