Ben Coogan

Franchising – on the Frontline

Ben Coogan

18 December 2013

Competition and Consumer Law Franchising

In franchise disputes, perhaps the most common allegation is that a franchisor misrepresented the profitability of the franchised business to an incoming franchisee and as a result of that conduct, the franchisor contravened s52 of the Trade Practices Act (TPA), now s18 of the Australian Consumer Law.

 

The latest decision on this issue, delivered by Justice Greenwood of the Federal Court of Australia Queensland District in Julstar Pty Ltd v Hart Trading Pty Ltd[1] on 12 December 2013, confirms the importance of forensically analysing the factual matrix, and contemporaneous documents, surrounding the alleged conduct.  The franchise in question was Frontline Recruitment and Frontline Retail.

 

Background

 

The Brisbane office of Thomson Geer represented the first and second respondents, Hart Trading Pty Ltd and Colleen Hart respectively, in these proceedings also initiated against them by the applicants (two companies: Julstar Pty Ltd and Semolina Pty Ltd, and their sole director, Ms Julianne Stariha (collectively the applicants)) for alleged misleading or deceptive conduct in contravention of s52 of the TPA.

 

The dispute concerned events leading up to the entering into of franchise agreements by the applicants, and their sole director, Ms Stariha, with the franchisor – Frontline Recruitment Group Pty Ltd (the third respondent). The agreements in question in the proceeding comprised of: a contract with Hart Trading (the first respondent) to acquire the Frontline Retail Gold Coast business owned by Hart Trading; and entry into a franchise agreement with the third respondent to operate a Frontline recruitment hospitality agency at the Gold Coast.

 

The applicants contended that, were it not for false representations made by Ms Hart (director of the first respondent) and Peter Davis (managing director of the third respondent), as to the business prospects of the Frontline franchises, the applicants would not have entered into the agreements.[2]

 

Claims against the First and Second Respondents

 

One of the applicants, Ms Stariha, contended Ms Hart had represented ‘that every franchisee of [Frontline] is successful’, and made various statements regarding the value and expected earning of the franchise.[3]  Importantly, Ms Stariha alleged that Ms Hart had confirmed the accuracy of a spreadsheet prepared by Ms Stariha of her calculations of the prospective revenue and expenses associated with operation of the retail franchise.  The first and second respondents denied these representations, giving a very different version of events.[4]  The Court was required to determine which evidence should be accepted.

 

Claims against the Third and Fourth Respondents

 

As against the third and fourth respondents, Ms Stariha alleged that Mr Davis (amongst other things) informed her that the Gold Coast Retail Frontline Agency was capable of achieving quite a high quantity of sales per annum, and that all of the Frontline franchises had been, and were operating successfully.[5]

 

Additionally, Ms Stariha contended that the conduct of the third respondent and its representatives in their lack of assistance to her throughout operation of the franchises was a breach of the relevant Franchise Agreement.  Ms Stariha further contended that she was not provided with an accurate Disclosure Document by the third respondent or one in the time prescribed by the Franchising Code of Conduct (Code), and therefore the third respondent was in breach of the Code.

 

Collectively, the applicants claimed that these misrepresentations induced purchase of the franchises, which ultimately resulted in loss as the franchises were not as successful as predicted.

 

Decision

 

Claims against the First and Second Respondents

 

In relation to the claims against the first and second respondents, Greenwood J preferred Ms Hart’s evidence to that of Ms Stariha’s, that none of the alleged representations were made.  In relation to the spreadsheet issue, his Honour was not convinced that Ms Hart assured Ms Stariha of the accuracy of her calculations regarding revenue and costs.[6]  Ultimately his Honour determined that Ms Stariha had relied upon her own analysis to conclude about the profitability of the businesses, leading to her acquisition of the franchise.[7]  Of significance was Ms Stariha’s excitement and readiness to purchase the franchise in various correspondences with Ms Hart.[8]

 

Claims against the Third and Fourth Respondents

 

In relation to the claims against the third and fourth respondents, Greenwood J also preferred the evidence of Mr Davis over Ms Stariha regarding the alleged misrepresentations as to the profitability of Frontline Franchises, noting that Mr Davis had no financial interest in securing sale of the retail franchise to Ms Stariha.[9]  With regard to the hospitality franchise, his Honour determined that Ms Stariha’s quick acquisition of the franchise after entry into the retail franchise agreement ‘did not accord with conduct of a person concerned about being led into operation of a business on the footing of ‘misrepresentations’ of the earnings and value of the franchise’.[10]  Finally, the Court found there was no breach of the Code by the third respondents, given that an accurate Disclosure Document was provided.[11]

 

Accordingly, the Court found that there was no contravention of the TPA and the applications were dismissed.

 

The Court is yet to determine the issue of costs with that decision expected to be delivered in 2014.

 

This most recent franchising decision highlights the need for franchisors and vendor franchisees to keep good records of key conversations and key documents and correspondence provided to prospective franchisees prior to the entering of business sale agreements and franchise agreements.

 


[1] [2013] FCA 1359.

[2] Ibid, [8]-[12].

[3] Ibid [22]-[31].

[4] Ibid [300]-[346].

[5] Ibid [37]-[45]; [49]-52].

[6] Ibid [741].

[7] Ibid [745].

[8] Ibid [737]-[738].

[9] Ibid [761].

[10] Ibid [768].

[11] Ibid [777]-[782].