It is an old fashioned saying which many dismiss as having little relevance to today’s ever changing technology driven world: “your word is your bond”. Yet this concept is at the heart of business activity in Australia.

When two people agree to do business with each other they are agreeing to do what they say they will. This is often on terms discussed between them and recorded in writing: at law a contract which in the franchising context is a franchise agreement.

The essential tenet being once their word is given (or the franchise agreement is signed) each of the parties is entitled to expect the agreement to be carried out as they have agreed and if it is not to ask the courts to enforce the terms of the agreement reached. This provides certainty to parties entering into transactions with each other and a confidence to proceed with plans, employee staff, spend money and undertake trade and commerce.

This update looks at a recent case where parties have asked the courts not to be held to their ‘word’ and why the courts have said that the deal struck must be complied with or consequences faced. The outcome having the effect of maintaining certainty for parties and the business community in general that where a party gives their word they will be held to what was agreed.

Two of the primary recurring arguments raised in the franchising context as to why a party should not be bound by their ‘word’ are due to:

  1. misleading and deceptive conduct on the part of one of the parties which was relied upon by the other causing them to enter into the franchise agreement; and
  2. failure to comply with the Franchising Code of Conduct through inadequate or non-disclosure by the franchisor party.

Both can provide an exception to the maxim “your word is your bond”, but to do so it is necessary to prove this to the satisfaction of a court, meeting the tests developed to satisfy a court it is appropriate to overturn any deals struck between parties.

MISLEADING AND DECEPTIVE CONDUCT

Where a party alleges it has been mislead or deceived then it is necessary to:

  1. be clear about what conduct is supposed to have mislead or deceived the party and demonstrate that this occurred;
  2. have occurred before or simultaneously with the provision of a parties ‘word’ (entrance into an agreement);
  3. been relied upon by the party allegedly mislead or deceived as the basis for providing their word (entering into an agreement) with sufficient evidence to demonstrate this was the case; and
  4. causes loss of damage to the party relying on the misleading and deceptive conduct.

A decision of Judge Koppenol of the Queensland District Court in Guirguis Pty Ltd & Ors v Michel’s Patisserie System Pty Ltd & Ors (Guirguis v Michel’s) delivered on 27 May 2016 demonstrates that to be successful in not having to be bound a person must meet all these requirements.

In Guirguis v Michel’s the franchisee was:

  1. provided with the material required under the Franchising Code of Conduct;
  2. admitted in evidence that “a lot of stuff influenced his decision to enter into the agreements”, “he had “maybe 200 discussions with 50 different people””, he “did a lot of research… read a lot of stuff on Google…”, that he was ‘swayed to enter into it [the franchise agreement] by the number of Michel’s Patisserie stores operating in Australia”;
  3. considered by the judge to be a mature educated man who was not one to rush or be pushed into signing business agreements;
  4. asked to sign a Deed of Prior Representations and Questionnaire and record in that any representations or warranties which had been made and whether it influenced their decision to enter into the franchise agreement. He answered ‘yes’ to three questions.

The franchise agreement contained a term which said that Mr Guirguis did not rely upon pre-contractual representations made by Michel’s.

Despite an additional opportunity being given to Mr Guirguis by Michel’s to place on the record any information upon which he had relied in entering into the franchise agreement Mr Guirguis did not provide any further information.

The three alleged representations referred to by Mr Guirguis in the Deed of Prior Representations and Questionnaire were not those set out in the court proceedings Mr Guirguis started seeking the Court’s consent not to be bound by the terms of the franchise agreement. The representations set out in the Court proceedings had not been mentioned by the Guirguis in the Deed of Prior Representations and Questionnaire.

The Court found that the Guirguis’ sought and had legal advice, reflected on the franchise proposal and carefully read the documents before signing them, were given an opportunity to correct any incorrect or inadequate answers to the Deed of Prior Representations and Questionnaire but remained silent.

In those circumstances the Court said that it was not convinced that the Guirguis’ entered into the franchise agreement based on the alleged representations pleaded in the court action commenced by them and as such the franchise agreement stood and was enforceable.

FAILURE TO COMPLY WITH FRANCHISING CODE – NON OR INADEQUATE DISCLOSURE

Where a party alleges non-disclosure by one person to another then it is necessary to:

  1. identify the non-disclosure made in the context of the requirements for disclosure set out in either:
    1.  Annexure 1 of the Franchising Code of Conduct; or
    2. section 17 of the Franchising Code of Conduct.
  2. characterise that non-disclosure as so materially significant to the decision to provide the person’s word to enter into the franchise agreement that it is not appropriate to allow the agreement to stand. As the High Court of Australia has said in Master Education Services Pty Ltd v Ketchell that non-compliance on its own did not result in the franchise agreement being void and unenforceable.

Justice Koppenol was also asked to consider this in the Guirguis v Michel case.

In that case the allegation was that the franchisor had failed to disclose matters it knew or ought to have known prior to the parties giving their word and entering into the franchise agreement, which if it had been disclosed would have resulted in Guirguis not entering into the franchise agreement.

Michel’s was alleged to have known prior to entrance into the franchise agreement that there was acute problems with the supply of product to Townsville of Michel’s products.

The Court found that:

  1. there was no evidence that there were acute problems of supply of product to Townsville;
  2. any temporary disruption had been remedied by the time that Guirguis franchise became operational; and
  3. Guirguis had not relied on this in entering into the franchise agreement as it had not been stipulated as a matter which had been relied upon.

The court said that no obligation to disclose the matters claimed by Guirguis post entrance into the franchise agreement had been made out.

The Court found as a result of the parties conduct that Guirguis in fact owed Michel’s $650,552.24 damages for its losses when Guirguis abandoned the franchise business and broke its ‘word’ by not honouring the franchise agreement without sufficient excuse justifying such conduct.

Whilst the law has recognised that in some instances it is not appropriate to expect enforce the ‘word’ given by one of the parties to be able to be enforced, the central concept still today is that a party’s ‘word is their bond’ and agreements entered into will generally be enforceable.