The recent decision of St Leger Investments Pty Ltd v True Blue James Pty Ltd & Ors [2013] FCCA 601 identifies the difficulties franchisees can face when attempting to prove that a franchisor has engaged in misleading or deceptive conduct. In particular, the decision illustrates that statements about the achievability of a certain level of sales cannot be divorced from the context in which they are made. Good advice prior to the launching of legal action should be obtained to attempt to avoid protracted and costly unsuccessful actions.

Facts

Mr Tyler, an accountant, was in full-time employment with Racing Victoria when he resigned to pursue his interest in the franchise business. On 28 June 2010 he entered into a regional franchise agreement with True Blue James Pty Ltd (TBJ) whereby he could sell sub-franchises to individuals in his region. Mr Tyler’s income under this arrangement was to be collected from the sales of the franchises and a percentage of the turnover of each of them.

As part of the application process, TBJ had required Mr Tyler to submit a business plan. Mr Tyler provided two business plans for consideration by a director of TBJ, and in these plans projected a level of sales at one per month for a period of 5 years. Mr Tyler alleged that he had sought and was given assurance that these projected sales were “easily achievable” or “achievable”.

Additionally, prior to entering the contract, Mr Tyler had been made aware of the existence of the previous regional franchisee and the Victoria Statewide Master Franchisor which had both ceased trading prior to Mr Tyler entering the agreement.

Mr Tyler alleged that he had attempted to obtain the contact details of these parties but that these attempts were ignored by TBJ.

The franchise business subsequently was unsuccessful and by late September Mr Tyler had repudiated the agreement and ceased trading.

In proceedings before the Federal Circuit Court Mr Tyler alleged that:

  1. the representations made in relation to the projected sales (among others) were misleading and deceptive within the meaning of section 52 of the Trade Practices Act (now section 18 of the Australian Consumer Law); and
  2. that TBJ had failed to comply with its disclosure obligations under the Franchising Code of Conduct.

Decision

Justice O’Dwyer was not satisfied on the evidence that the oral representations complained of had actually been made. There were considerable inconsistencies between the pleaded allegations of misrepresentation, the affidavit evidence of Mr Tyler and his evidence in the witness box.

It was noted that the law required that representations be “proved with a degree of precision to enable the court to be reasonably satisfied that they were in fact misleading in the circumstances.” Accordingly, there was insufficient evidence to conclude that the representations were made.

Nevertheless, his Honour went on to consider whether the alleged representations, if made, could properly be characterised as misleading or deceptive.

Were the representations misleading or deceptive?

Mr Tyler had placed great emphasis on the assurances from TBJ that the projected sales of one per month for a period of five years were “achievable” or “easily achievable”. However, these representations, if made, could not properly be characterized as misleading or deceptive.

The primary reason given by his Honour was that there was evidence to the satisfaction of Mr Tyler, that sales had been achieved to a satisfactory level in Queensland. Additionally, Mr Tyler had assured himself on questioning other franchisees that the projected sales were achievable.

Justice O’Dwyer also stressed that attention must be paid to the context in which the alleged representations were made. The franchise was concerned with the marketing of a product (sub-franchisees); and in that environment the success of an individual largely depends on level of sales skills. Accordingly, it could not be said that the representations were misleading or deceptive.

Reliance

Even if Mr Tyler had been able to prove the alleged representations had been made and that they were in fact misleading or deceptive; as he had not relied on them, they could not be said to have caused his loss. It was said that Mr Tyler was confident in his own capacity as an accountant and felt that he did not need to make any further enquiries. Justice O’Dwyer was not even satisfied that if he had contacted the previous franchisees he would not have committed himself to the franchise business.

It was also on this ground that Mr Tyler’s claim on the basis that TBJ had failed to comply with its disclosure obligations was rejected. It was found that TBJ had breached the Franchising Code of Conduct by failing to provide the contact details of the previous regional franchisee and the Victoria Statewide Master Franchisor. However, Mr Tyler, had full knowledge of the existence of these parties and having pursued to some degree a request for their contact details, chose in the end to go ahead and enter the agreement.

In the absence of any evidence to indicate reliance on the alleged representations or the breach of the Franchising Code, it could not be said that Mr Tyler’s loss was caused by TBJ. As a consequence of this and the deficiencies mentioned above, the claim was dismissed.

Take Home Tips

The following key points can be taken from this case:

  • In order for a claim of misleading or deceptive conduct to succeed the applicant must be able to prove with a degree or precision that the representations were actually made;
  • In determining whether a representation is misleading or deceptive regard will be had to the context in which it was made; and
  • Failure to establish that a representation was relied upon and thus caused the loss suffered, will be fatal to any claim.