Misleading and deceptive conduct remains one of the most frequent allegations arising in franchise disputes. The recent decision of Carazi Pty Ltd  v Blow Dry Bar Franchising Pty  Ltd (in liq) & Anor (No. 2) in the NSW Supreme Court highlights the importance of having a reasonable basis to make a claim regarding a future matter, and the duty to correct claims after becoming aware of their falsity.

Facts

Carazi Pty Ltd (Carazi) entered into a franchise agreement with Blow Dry Bar Franchising Pty Ltd (BDB). The agreement involved the operation of a hairdressing salon in Castle Hill. The business was unsuccessful and never made a profit.

Carazi alleged that it was induced to enter into the lease and franchise agreement by misrepresentations made to it by BDB through Mr Cuneen and an agent of BDB, Mr Simon Morton, as well as other misrepresentations made directly by Mr Cuneen.

Amongst other things, Carazi claimed that the BDB and others engaged in misleading or deceptive conduct in contravention of s 18 of the Australian Consumer Law (ACL). Carazi also claimed BDB engaged in unconscionable conduct and acted in breach of Franchising Code of Conduct.

Representations

Carazi alleged a number of representations were made to its managing director, Mr Giaimo, prior to entering into a lease for premises and the franchise agreement.

An email from Mr Morton said “All of our outlets are extremely profitable … and are usually cash flow positive within 1 month”.

At the time this representation was made, Mr Cuneen was aware that at least one franchise was not operating profitability after 18 weeks of trading. This particular franchise never traded profitably.

Mr Morton provided a powerpoint presentation which contained statements such as “Low investment = Huge Profits” and “Join a thriving business model”. It was also said that support was offered to franchisees including finding a site for the salon, finding and training staff, negotiating with the landlord, designing the salon and managing the construction program, as well as “equip each salon to the highest standard”.

On more than one occasion Mr Giaimo asked whether all the salons were profitable.

Mr Cuneen responded that the other salons were all doing well.

Mr Morton sent Mr Giaimo profit and loss statements for BDB businesses conducted at five locations at Sydney and Melbourne. These statements were for company-run stores, not franchised operations. The Court considered these figures included false information.

When Mr Cuneen told Mr Giaimo that he had located a site in Castle Hill, Mr Giaimo asked whether it was going to be a profitable location, to which Mr Cuneen responded “It’s a great new site and you will do well out there. Castle Hill is a good area to do business”.

Court’s findings

The Court was satisfied that the defendants had engaged in misleading and deceptive conduct.

The Court found that once Mr Cuneen was aware that other franchises were not operating profitability, he was under a duty to correct the representations. These statements were misleading and deceptive and false.

The Court also found that the statements regarding the provision of a dedicated operations manager and suitably trained staff was false. The plaintiff was not provided with an operations manager or sufficient trained staff to run the franchise.

These statements regarding profitability and the provision of staff were both future matters and the burden of adducing evidence that there was a reasonable basis for them lies on the parties making the statements. For both representations, BDB failed to establish there was reasonable basis for making those claims.

The Court was satisfied that statements regarding the suitability of the Castle Hill location had no reasonable basis and were misleading.

BDB and others were liable for damages pursuant to section 236 ACL for contravention of s 18 ACL. The plaintiff was awarded $732,697 which included $35,000 for the franchise fee, $67,000 for the fit-out of the salon, and trading losses and legal fees.

It was not necessary for the Court to order that the franchise agreement was void or voidable as Mr Giaimo had already effectively rescinded the agreement.

Key Lessons

For franchisors:

  • Before making any representations as to future matters, make sure there is a reasonable basis for you making the statement.
  • If you have made a statement believing it to be true, then subsequently become aware that it is false, steps need to be taken to correct the prior statement.
  • Finally, do not make promises you cannot keep. Telling a potential franchisee that they could “earn good money” is one thing, but it is entirely different to promise them they “will earn $18,000 per week by only working 10 hours”.

For franchisees:

  • Carefully evaluate all information received from potential franchisors. Have they promised or guaranteed certain things such as profitability and support?
  • Be aware of “sales puffery”. False and misleading representations are prohibited by the ACL, sales puffery is not. The ACCC describes “puffery” as a term used to describe wildly exaggerated, fanciful or vague claims for a product or service that nobody could possibly treat seriously, and that nobody could reasonably be misled by. 

 Kate Van Der Heyden