Misleading and deceptive conduct as mentioned in past updates is one of the most common causes of franchising disputes. However, franchisees should be aware that simply proving that a representation is misleading is not enough, it is also necessary to prove reliance on the misleading representation to gain court relief. This point is well demonstrated by the recent case of JM & PM Holdings Pty Ltd v Snap-on Tools (Australia) Pty Ltd [2015] NSWCA 347.

BACKGROUND

JM & PM Holdings Pty Ltd (franchisee) entered into a Franchise Agreement (Agreement) with Snap-on Tools (Australia) Pty Ltd (franchisor) on 27 October 2009. The Agreement gave the franchisee the right to operate a Snap-on franchise which involved the sale of various “Snap-on” branded tools and pieces of machinery throughout a large area in remote South Australia.

The franchisee fell into arrears and the Agreement was terminated. The franchisor commenced proceedings to recover the debt. The franchisee cross-claimed, alleging that a “monthly cash flow projection” spreadsheet, which was given to the franchisee’s director, Mr Morgan, prior to entering into the franchise agreement, was misleading.

The primary judge found that aspects of the spreadsheet were misleading. However, it was found that Mr Morgan did not rely on the document when entering into the Agreement and thus the loss or damage was not a result of the misleading spreadsheet being provided to him. The franchisee’s cross-claim was dismissed. The franchisee appealed this decision.

THE APPEAL

The Court of Appeal acknowledged that the spreadsheet contained serious errors, such as overstating amounts. However, the Court of Appeal noted that the franchisee could only obtain a remedy if the contravention caused the loss. 

It was clear that the franchisor had considered that the methodology in the spreadsheet was appropriate with some adjustments. The Court of Appeal noted, however, that the question is not whether the document was misleading or deceptive in theory at some particular time, but whether, having regard to all the relevant circumstances leading up to the entry into the Agreement, there was conduct which was misleading or deceptive, or likely to mislead or deceive, which caused the alleged loss or damage.

The Court of Appeal therefore had to consider whether Mr Morgan, on behalf of the franchisee, relied upon the information in the spreadsheet when deciding to enter into the Agreement. The Court considered a number of factors when deciding whether there had been reliance by Mr Morgan.

Firstly, the documents that Mr Morgan signed when entering into the Agreement clearly stated that the franchisor did not make any promises about financial matters. In cross-examination Mr Morgan conceded that he understood this.

Secondly, it was also revealed that Mr Morgan had given the spreadsheet to his accountant, Mr Julian, and discussed this with him at three meetings.  Whilst it was unclear what Mr Julian’s advice had been, Mr Morgan admitted during cross-examination that in causing the company to enter into the Agreement he was relying on Mr Julian’s advice. Moreover, prior to entering the Agreement, Mr Morgan acknowledged to the franchisor that he had received accounting advice from an independent accounting advisor.

When considering the spreadsheet, the Court of Appeal noted that if the franchisor had provided it to Mr Morgan as an unadvised person without accounting expertise and Mr Morgan subsequently relied upon it, misleading and deceptive conduct may have occurred. However, if the spreadsheet was acted upon, it was acted upon in circumstances where the franchisor was informed in writing by Mr Morgan that the franchisee had obtained advice from an independent accounting advisor, being Mr Julian. Mr Julian would have been a person who the franchisor could expect to understand the subtleties of the spreadsheet and who would not simply rely upon the totals in it without examining it to ascertain how they were arrived at.

Thirdly, it was concluded that Mr Morgan was prepared to cause the franchisee to enter into and be bound by the Agreement on the basis that he was relying exclusively upon the documents disclosed within the agreement, and expressly on the basis that no earnings information was provided.

Taking into account these three factors, the Court of Appeal found that the franchisor’s conduct was not misleading or deceptive due to the absence of reliance by Mr Morgan on the spreadsheet. 

The franchisee had also attempted to argue that the spreadsheet contained “earnings information” which was not sufficiently disclosed, and thus was in contravention of the Franchising Code of Conduct (Code) but both the primary Judge and the Court of Appeal agreed that the spreadsheet could not realistically be considered to be part of the disclosure documents and as such was not subject to the obligations in the Code.

The appeal was dismissed, Therefore, the franchisee was unsuccessful in its attempt to avoid payment of monies owed to the franchisor

LESSONS

When franchisors provide documents to potential franchisees, particularly which go to expected earnings, it is important to ensure that the information is accurate and qualified appropriately to ensure that franchisees are not misled.

Further, it is best practice where such documents are provided, to confirm that independent accounting advice has been received and that the franchisee understands that there is to be no promises about those financial matters and that the agreement to enter into the franchise is to be based exclusively on the franchise agreement and disclosure statements. Such acknowledgements should be provided for in franchise agreements and the Code, by Regulation 10, does require that a franchisee confirms that they have taken accounting advice or alternatively, have been told that they should take such advice but have decided not to seek it.

If these steps are taken, then any claim by a party that they have been misled may be challenged on the grounds that there was not reliance on those documents. 

The author wishes to acknowledge Law Clerk Ann-Marie Coleman for her contribution to this article.