During the course of pre-franchise negotiations, franchisors are frequently asked to provide information on the turnover, expenses and profitability of a proposed franchise.

Recently the Victorian Court of Appeal in Trans-It Freighters Pty Ltd v Billy Baxters (Franchising) Pty Ltd [2012] VSCA 71 found a franchisor to have been misleading and deceptive in pre-franchise discussions where information of a similar type was sought.

This article provides an outline of the decision and what lessons can be learned.

What Happened?

In early March 2004, Mr Mauviel (Mauviel) realised the 20 Jetty Road, Glenelg, South Australia premises (Premises) were vacant and thought that they would make a good Billy Baxter franchise. He communicated with the landlord and an offer was obtained from the landlord to lease the premises for $160,000 per annum for a ten year term with options. Mauviel considered that to be market value.

On 10 March Mauviel advertised in the SA Advertiser stating a franchise opportunity would be available at the Premises.

Mrs Pollard responded expressing interest on behalf of Trans-It Freighters Pty Ltd (Trans-IT), for which her husband and herself would act as guarantors.

Mauviel emailed Mrs Pollard with an information pack (franchise information brochure) and an application form which was required to be forwarded to head office with a refundable cheque of $1000 to secure her interest.

The information pack included a section that stated before entering into the food industry you should ask yourself a number of questions including:

  • Do you realise that all business ventures pose some risk?
  • Have you researched franchising?
  • How much will it cost you to establish a business?
  • Can you minimise and control expenditure?
  • Which location, how much area and how much rent should you pay?

It also stated ‘no previous food industry experience is required as we provide a comprehensive training programme, assistance with start up and ongoing management support.’

The pack included an invitation to contact Mauviel who was described as Franchise Manager SA/WA. Mauviel in fact held an agreement with Billy Baxters (Franchising) Pty Ltd (Billy Baxters) that in addition to owing and operating his own franchises in South Australia, Billy Baxters also actively engaged his services to participate in the sale of his own franchise business and new franchise businesses in South and Western Australia for which he would receive a portion of the franchise fee and royalties.

Mauviel met with the Pollards and was alleged to have made representations on behalf of Billy Baxters, in the course of franchise negotiations with Trans-IT and Mr and Mrs Pollard, between 18 and 19 March 2004.  

The representations were alleged to be:

  • The proposed annual rent of the franchise site on Jetty Road, Glenelg, South Australia, of $160,000 was reasonable having regard to the projected turnover of the franchise;
  • The projected turnover of the franchise’s first year of operation would total $1,300,000;T
  • The projected sales for the first year of operation would total $1,365,000 excluding GST;
  • The net profit for the first year contained on a spreadsheet provided by Mr Mauviel to the Pollards would be $175,732;
  • Having regard to the projected turnover of the franchise, the level of rent for the premises was reasonable.

Mauviel explained to the respondents that the figures were deduced from the returns and success of comparable Billy Baxters franchises, and projected a turnover for the proposed site based on figures from a franchise site at Norwood Parade and Cavill Mall on the Gold Coast which were in comparable locations.

The Pollards advised Mauviel that they were owners of a Boost Juice franchise which was only paying $58,000 per annum rental and that they thought the $160,000 per annum was exorbitant.

Mauviel agreed to and did provide an electronic spreadsheet which he said the Pollards could assess the viability of the business and “play around with different turnovers”. Figures were filled in the spreadsheet when it was sent included the projected turnover in excess of $1.365 m. A disclaimer appeared at the bottom of the spreadsheet saying the information provided was for information purposes only and recommended seeking independent advice. The Pollards ignored these recommendations.

Trans-It duly commenced operating the franchise but fell into arrears for payments under the franchise agreement. Billy Baxters terminated the franchise agreement and commenced proceedings to recover the unpaid amounts.

Trans-It and the Pollards counter-claimed that Billy Baxters had engaged in misleading conduct under s51A of the Trade Practices Act (TPA) as was in force at the time and sought damages.

At first instance, the trial judge held that the grounds for making the representations about the future projected earning of the franchise operating from the Premises were reasonable as:

  • Any sensible person would insert their own figures;
  • The disclaimer stated utmost care had been taken putting spreadsheet figures together;
  • The Pollards did not have regard to the full communications from Mauviel;
  • The Pollards ignored the warnings to get their own advice; and
  • The Pollards were aware of the limitations of the information provided by Mauviel.

Issues

This matter went on appeal to the Supreme Court of Victoria Court of Appeal.

The question for the court was whether the trial judge had erred in finding that the representations as to future ‘projected’ turnover were based on reasonable grounds.

Findings

The Court of Appeal found that the representations about the rent or turnover were not made on reasonable grounds and that the onus of the party asserting that there was no reasonable grounds for the representations about future matters was met.

This was because:

  • The fact that turnover of a particular amount was required to make the rent affordable bore ‘no logical connection’ to a representation as to what turnover would actually be;
  • The projected $1.3m figure was not the result of quantitative analysis as Mauviel conceded he had done no due diligence on the Premises and just because many restaurants operated near the Premises did not mean that these were profitable or that a niche market for a Billy Baxters existed;
  • Mauviel’s belief in the anticipated turnover and profit set out in the business plan could not constitute reasonable grounds when he was aware that the actual sales for Norwood did not support such a basis;
  • No rational link exists between the Norwood restaurant turnover (incorrectly represented to the Pollards as $1.1m) and that of the Jetty Road establishment ($1.3m) as the figures for an opened store would differ from an unopened store.

Conclusion

The Trade Practices Act and now section 4(1) of the Australian Consumer Law provides that a representation about any “future matter” is deemed misleading if the person making it does not have “reasonable grounds” for making it.

It is the person who made the representation who must present evidence to the court showing reasonable grounds for making such claims.

When making such representations having the support of demographic, spending habits and customer frequency of the location of the franchise site, past trading and trending information, detailed knowledge of other factors affecting the site will be helpful in determining the reasonableness of the representations as to future matters relating to a franchise.

Similarly when information is provided consistency between what is said and what appears in writing is imperative.

Any caveats or matters about what is provided should be clearly stated and if necessary drawn to the attention of the people to whom the representations are made.

When providing ‘tools’ such as spreadsheets to run figures and evaluate outcomes of a business, consider whether there are certain amounts / figures that can be included with certainty (for example the rate of franchise royalty payments, rent if it is an preexisting franchise) and those which cannot be inserted without potentially being seen as a representation that does not have reasonable grounds for being made.

If figures for other franchises are proposed to be provided consider detailing the basis on which these are reasonably considered to be comparative stores and potential reasons why this might differ, so it is apparent to the recipient on what basis the material is provided.

Employment of deeds of prior representations to verify the representations on which franchisees say they rely on to enter into franchise agreement is also a useful tool to assist identify whether clarification or misunderstanding or miscommunication that has occurred prior to signing up a new franchisee whose expectations are inaccurate.