The Federal Court in SPAR Licensing Pty Ltd v MIS QLD Pty Ltd (No 2) [2012] FCA 1116 delivered a judgment emphasising the importance of disclosing current financial documents prior to entering into a Franchise Agreement.

This update provides a summary of the case and the court’s reasoning.

Background

SPAR Licensing (SPAR) is a company that supplies dry groceries and related services to retail grocery outlets in Queensland and Northern New South Wales. The company competes with Metcash and its subsidiary, IGA (Metcash).

SPAR and MIS Pty Ltd (MIS) entered into a Special Offer Agreement in December 2010 and then entered into a Franchise Agreement on 1 February 2011. Under the Franchise Agreement, MIS operated a supermarket on Macleay Island under the SPAR brand and were supplied groceries by SPAR.

The proceedings arose from MIS seeking to exit the Franchise Agreement in August 2011 after entering into an Alliance Agreement with SPAR’s rival, Metcash/IGA.

The Claims

SPAR’s Claims

SPAR sought specific performance of the Special Offer Agreement and Franchise Agreement and relief under the Competition and Consumer Act 2010 (Cth) arguing:

  1. the Alliance Agreement entered into by MIS and Metcash contained an exclusionary provision contrary to s45(2)(a)(i) of the Act; and
  2. even if the provision under the Alliance Agreement is not exclusionary, it has the purpose of substantially lessening competition in contravention of s45(2)(a)(ii).

MIS’s Claims

MIS defended the claims by SPAR and made a number of counter claims including:

  1. SPAR contravened clauses 6B and 10 of the Franchising Code of Conduct as they failed to provide MIS with current financial information prior to the execution of the Franchise Agreement. MIS claimed that this was also a breach of s51AD of the Trade Practices Act (TPA);
  2. SPAR made representations to MIS prior to entering into the Franchise Agreement that if MIS became a SPAR franchisee and later wanted to convert to IGA then they could terminate the contract on the condition that they pay SPAR the termination and related fees. MIS argued that as a result of their litigation conduct these representations were misleading or deceptive under section 18 of the Australian Consumer Law; and

MIS argued that the conduct of SPAR were of such significant character that the Court should set aside or vary both the agreements between MIS and SPAR.

Decisions

The Court accepted that MIS’s conduct in seeking to terminate the Franchise Agreement and attempting to convert to IGA was in breach of the Franchise Agreement.

Did MIS and Metcash enter into an exclusionary provision contrary to s45(2)(a)(i) of the Competition and Consumer Act 2010 (Cth) (CCA)?

SPAR claimed that the agreement between Metcash and MIS contained an exclusionary provision, providing that if MIS terminated its agreement with SPAR, Metcash would assist financially. Further, the provision guaranteed that Metcash would not acquire, redevelop or expand the Food Works supermarket on Macleay Island.

The Court considered whether MIS and Metcash were competitors in the market. It was found that MIS and Metcash could not be competitors in the market because each fulfilled a different function. MIS being a retail supplier on Macleay Island, whereas Metcash were wholesale suppliers.

This argument failed on the basis that MIS and Metcash were not competitors in the same market.

Did the agreement have the effect of substantially lessening competition contrary to s45(2)(a)(ii) of the CCA?

SPAR claimed that if it was removed as a wholesale supplier on Macleay Island or in the Moreton Bay region, it would substantially lesson competition in that market.

The Court found that the relevant market was the Macleay Island Wholesale Market, as SPAR had given insufficient evidence to support many other of the markets pleaded.

The Court concluded that the purpose of the Agreement did not substantially lessen competition as:

  1. there was a FoodWorks retail supermarket on the island which also received supplies from Metcash;
  2. MIS was to become an IGA banner store, so there would still be competition between FoodWorks and MIS in dry groceries; and
  3. the Macleay Island market constituted less than one percent of SPAR’s total sales in dry groceries.

The Court said that this fell well short of satisfying the requirement that the provision substantially lessens competition in the Queensland wholesale market.

The Court concluded that on this basis, SPAR failed to bring sufficient evidence to support the claims.

Did SPAR breach the Franchising Code?

It was argued that SPAR breached s51AD of the TPA, which states that ‘a corporation must not, in trade or commerce, contravene an applicable industry code’. The Franchising Code of Conduct (Code) being a mandatory industry code under the Schedule.

SPAR’s primary argument was that they had complied with their obligation to supply a disclosure document under clause 6B(1) of the Code by providing MIS with a Disclosure Document on 21 July 2010. The Court did not accept this argument.

While SPAR had given MIS a disclosure document on 21 July 2010, the Franchise Agreement between the parties was not executed until 1 February 2011. During the delay between the release of the disclosure document and the beginning of the Franchise Agreement, the financial position of the SPAR group had seriously deteriorated.

The Court held that SPAR was obligated to create and provide MIS with a disclosure document that reflected ‘current and reliable financial information’ as at the time MIS directors were contemplating entering into the Franchise Agreement.

The Court held that SPAR had contravened section 51AD of the TPA however; MIS had not established any basis upon which they should receive an additional award of damages as a result of the breach. The Court varied the terms of the Franchise Agreement so as to enable MIS to terminate the agreement on payment of termination and associated fees. The Court chose not to set aside either the Franchise Agreement or the Special Offer Agreement.

Did SPAR engage in Misleading and Deceptive Conduct?

The Court held that the alleged representations were misleading or deceptive as SPAR:

  1. refused to permit the cross-claimants to exit the Franchise Agreement;
  2. sought and obtained an interlocutory injunction preventing the cross-claimant from exiting the SPAR franchise and terminating the agreement; and
  3. brought proceedings seeking an order of specific performance against the cross-claimants in relation to the Franchise Agreement and Special Offer Agreement.

Were the representations relied on by MIS when deciding whether to enter into the Special Offer Agreement and the Franchise Agreement?

The Court determined that Mr Aplin and Mr Sichter of MIS personally relied on SPAR’s representations when deciding on whether to enter into the Franchise Agreement. Further, the Court reasoned that the misleading or deceptive representations were made in the context of SPAR’s campaign to induce MIS to become a SPAR Franchise. As such, the evidence would give rise to the inference that MIS had relied on those representations when entering into the Franchise Agreement.

The Court held that, on the balance of probabilities, MIS had suffered an actual financial loss consequential upon its inability to operate as an IGA franchisee from 1 September 2011. Further, the Court determined that the quantum of that loss was $12,715.39 for the period of 1 September 2011 to 1 December 2011.

The Court granted the franchisee, MIS, the following relief:

  1. a declaratory order for contravention of section 18 of the Australian Consumer Law;
  2. an order under section 87 of the CCA varying the Franchise Agreement and related Special Offer Agreement;
  3. an order that SPAR pay damages in respect of MIS’s loss, plus interest; and
  4. that an assessment be made of the quantum of the termination and related fees payable to SPAR upon MIS terminating those agreements which needed to be paid to SPAR.