In last month’s update we looked at the Government’s proposed changes to the Franchising Code of Conduct (the Code). One of these changes was to introduce a requirement that a party who wishes to bring an action or proceedings in relation to a dispute under a franchise agreement needs to do so in the State or Territory in which the franchised business is based.

This is particularly relevant in light of the recent decision of Wong v Jani-King Franchising Inc [2014] QCA 76, where the franchisee unsuccessfully opposed a finding that he had submitted to a foreign court’s jurisdiction and thus was subject to the orders made against him.

In this issue we look at the impact the choice of venue and applicable law has on franchise disputes. This is particularly important for franchises operating across different States and Territories, or internationally.

Facts of the case

Background

Jani-King Franchising (Jani-King) is a large cleaning franchisor. Jani-King commenced an action against Mr Wong, and two companies he controlled, for fraudulent representation concerning a regional franchise agreement. It was alleged Mr Wong falsely represented gross revenues and falsely established separate businesses to avoid reporting revenues and paying royalties.

In May 2011 Jani-King successfully obtained a judgment against Mr Wong in the sum of $944,725 (plus interest and costs) in the District Court of Dallas County, Texas in the United States.

Because that Court was not a recognized court under the Foreign Judgments Act 1991 (Cth) Jani-King then had to commence proceedings against Mr Wong in the Supreme Court of Queensland to recover the amount ordered by the Dallas Court. Mr Wong failed to file a defence resulting in default judgment being obtained against him in Queensland. Mr Wong applied to have this default judgment set aside and argued that the Dallas Court had not validly exercised jurisdiction over him and that he had not voluntarily submitted to the Texas Court’s jurisdiction.

Consideration was given by the Court to the Foreign Judgments Act 1991 (Cth), particularly section 11 which provides that a court is not taken to have had jurisdiction merely because the debtor entered an appearance or participated in proceedings only to the extent necessary.

The Supreme Court of Queensland was of the view that Mr Wong had engaged with the Dallas court and gone beyond ‘merely’ entering an appearance to contest the jurisdiction of the court. One of the key reasons for this

decision was that Mr Wong had failed to appear at an application to join a third party in the Dallas action and not filed any objection to the Dallas court hearing that application, which was consistent with an acceptance that the trial was to proceed.

This application to set aside default judgment was dismissed by the Supreme Court, causing Mr Wong to appeal to the Queensland Court of Appeal.

Decision

The Court of Appeal agreed that Mr Wong had submitted to the jurisdiction of the Dallas Court when he opposed the application to join him personally on the basis that it would delay trial.

Mr Wong had also argued that he filed a special appearance when first served with the Dallas proceedings, and this should have made it clear he was taking issue with the Dallas court’s jurisdiction. The Court of Appeal disagreed, saying that if this was the case Mr Wong should have taken steps to have the issue of whether it was it appropriate to hear the matter in Dallas resolved and failure to do this over an extended period constituted a waiver and therefore submission to the Dallas court hearing the matter.

Mr Wong’s appeal was dismissed.

Points to Note:

This case serves as a notice to franchisors and franchisees that it is possible to get recognition of an overseas judgment here in Australia but a key question will be whether the Foreign Judgments Act applies and whether the overseas court has validly exercised jurisdiction.

Franchisees and franchisors should not underestimate the importance of selecting an appropriate place to hear disputes. Choosing an inconvenient or inappropriate place may lead to unnecessary costs, inconvenience and delay. Further, the party defending the action should consider whether such proceedings were brought in an appropriate place and if it considers that the place is inappropriate seek advice to ensure that its objection to the place is maintained and not prejudiced by conduct that may be construed as contrary to that objection.

The choice of place in franchise agreements is important and can prevent uncertainty about the appropriate place in which proceedings are to be brought. Otherwise, franchisees and franchisors may find themselves subject to the laws of a place they did not anticipate when entering into the agreement.

The Commonwealth Government’s Exposure Draft of proposed amendments to the Franchising Code of Conduct (Code), also gives the question of place for proceedings added relevance for franchises.

Under the proposed changes there will be an additional section added to the Code which will mean:

  • A franchise agreement may contain a clause that, if a party to the agreement wishes to bring an action or proceedings in relation to a dispute under the agreement, it requires the party to bring the action or proceeding in a State or Territory in which the franchised business is based.
  • A franchise agreement must not contain a clause that requires a party to the agreement to bring an action or proceedings in relation to a dispute under the agreement in any other State or territory, and if it does, the clause is of no effect.

As mentioned in last month’s update, the Exposure Draft provides no definition of ‘franchised business’, so it is unclear at this stage if this refers to the State or Territory:

  • where the head office of the franchise exists;
  • in which the franchise acquired by the franchisee under the terms of a franchise agreement is located; or
  • in which the franchise is operative.

If a broad definition is given, this would suggest franchises which operate interstate, or internationally, can agree that any dispute proceedings be brought in a certain State/Territory of Australia. If a narrower definition is given, franchises may be limited as to which State/Territory they can specify.

In particular when dealing with international companies, franchisees and franchisors need to be vigilant. Foreign parties may need to adapt their overseas franchising agreement to comply with the Code and the issues of governing laws and place need to be considered and addressed.