Document before you implement. Clarify and agree to achieve certainty. These are just two of the lessons that can be observed in reviewing the case of an abandoned franchise in MW Group (Brisbane) Pty Ltd v MW Group Pte Ltd (MW Group). This case highlighted the practicality behind compliance with the Franchising Code of Conduct (Code) and effective communication between franchisors and franchisees to maintain a cooperative ongoing work relationship.
Facts in a nutshell
The summarised facts of the case are:
- The parties met and considered entrance into a joint venture and franchise agreement would be beneficial to them both;
- There was discussion about the terms of both agreements over a period of time;
- The parties began financing the MW Group franchise before clarity around their respective franchise obligations had been formalised;
- After the franchise agreement was finalised, the relationship between the parties deteriorated arising from different views about what each was to do;
- The court found that the joint venture and franchise agreement was mutually abandoned because neither party took steps to move the agreements forward;
- The MW Group Pte Ltd was ultimately found to have breached the franchise agreement for failing to provide the equipment to MW Group as required by the agreement.
If parties in discussion for a franchise make a ‘mere agreement’ to agree or negotiate, this is not a legally enforceable contract1. When establishing whether a franchise agreement is in effect and is binding the courts will consider:
- Did the parties intend the agreement to be binding? This is an objective consideration where the court will look to the facts of the case.
- Are the terms sufficiently certain to constitute a contract?
In the case of Australian Securities and Investments Commission v Fortescue Metals Group Ltd, the court held that the essential terms of agreement including scheduling and price had not been agreed upon by the parties. Also, there was no agreement as to the objective standard or mechanism to fix the content of these essential terms. The court held that there was not a binding agreement.
Conversely, in the case of RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH KG, the courts held there was a binding contract as unequivocal conduct of both parties lead to the conclusion that they had agreed on all essential matters such as when the project would be completed by and the agreed price.
The courts will often endeavour to uphold a franchising agreement. However, if the essential terms are in dispute the courts will be reluctant to determine that the contract is binding.
In instances where parties have commenced work before a formal agreement has been signed, the courts will look at the facts as a whole when determining whether a binding contract exists. It should not be assumed that the existence of and agreed upon ‘subject to contract’ clause is indicative of the absence of a binding agreement.
The prudent approach for both parties is to agree to all the terms between themselves first and commence work or implementation of the concept after agreement is reached.
Key terms disclosure
It is generally considered good business practice that a franchisee consider the legal, financial and commercial issues that may arise when entering a franchise agreement to enable them to make fully informed decisions.
Franchisors must provide franchisees with a disclosure document and a copy of the Code at least fourteen days prior to franchisees entering into an agreement or paying any non-refundable money or other valuable consideration in connection with the agreement. This is designed so that the franchisee is supposedly armed with the necessary information to make an informed decision about the venture.
There are four functions served by obtaining disclosure information namely:
- To gauge the extent and magnitude of the particular risks;
- Obtain reliable information;
- Disseminate information in a useable and accessible form; and
- Ensure options for the target audience to act upon the information.i
In MW Group, it was clear that the discussions and documentation surrounding the costs involved in starting the franchise business were not clearly understood by both parties and the adequacy of disclosure of costs of starting the franchise was in issue.
The franchisor had made a PowerPoint presentation to provide to potential investors. The franchisee alleged that in this presentation, the franchisor misrepresented the costs necessary to start a franchise with the company.
The franchisee argued that it had misunderstood the costs involved in starting the franchise business due to the manner and presentation of that information to the franchisee by the franchisor.
This misunderstanding lead eventually to a breakdown of the working relationship and agreement.
Confusion prevention tips
Franchisors should provide an environment of certainty for future investors in order to reduce risk and generate growth in the sector. The Franchising Code of Conduct (Code) imposes mandatory obligations on all domestic and in some cases international franchises with respect to disclosure and is enforceable under the Competition and Consumer Act 2010 (Cth) (Act).
Franchisors should use pre-approved materials that can be handed out to investors at the end of any presentations. This will ensure that potential franchisees are certain about the information presented.
Franchisees when considering entrance into franchise agreements also need to accept responsibility to attempt to reduce uncertainty and risk when entering into an agreement by seeking to have clarified and documented information provided to them as well as making their own enquiries. Franchisees should aim to study and understand any information presented to them and seek advice if uncertain of the effect of information provided to them on their decision making.
Analysis of the recent decision of MW Group demonstrates that both franchisor and franchisee have obligations to create an environment of certainty through open channels of communication and engagement as to the effect of information that may be provided in decision making.
Further, when an agreement is documented both parties need to ensure they implement their parts or face the risk of being found to have abandoned the agreement term.