The recent case of Traderight (NSW) Pty Ltd & Ors v Bank of Queensland Limited  NSWSC 55 demonstrates the variety of disputes that can arise out of a franchise relationship, as well as the approach the court will take to assessing them.
It also serves as a warning to franchisees that claims of misleading and deceptive conduct or unconscionable conduct will need to be proved to the standard required by a court to obtain relief.
The Bank of Queensland (BOQ) operated through corporate branches and agencies. However, from 2001 to 2003, these agencies converted to franchises – Owner Managed Branches (OMBs). In September 2003, BOQ decided to increase their operations by expanding interstate using their OMB model.
Between August 2004 and April 2007, BOQ established a number of new franchises in New South Wales (NSW). However, a significant amount of these branches were financially unsuccessful resulting in the franchises being closed or taken over by the bank.
In Traderight v BOQ, 11 franchisees who operated these OMBs in NSW sued BOQ (and in some cases, one or more of its employees) for losses they suffered as a consequence of entering into their respective franchise agreements and associated agreements and the failure of their business.
The OMB Parties argued that BOQ:
engaged in misleading and deceptive conduct;
engaged in unconscionable conduct;
was liable in negligence; and
some of the parties also made a claim based on the Industrial Relations Act 1996 (NSW) (IR Act).
Claim 1: Misleading and deceptive conduct
The fundamental claim of each OMB Party was that the BOQ engaged in misleading and deceptive conduct in contravention of the former Trade Practices Act 1974 (Cth) (TPA) (now section 18 of Australian Consumer Law) as well as the Fair Trading Act 1987 (NSW).
The OMB’s argued that a number of false, misleading or deceptive representations were made by BOQ after they opened their branches which caused the OMB parties to continue to trade and, in some cases, increase their borrowings to fund trading losses.
A key representation was that each regional OMB should be able to write $3 million in loans per month and each metropolitan OMB should be able to write $4 million in loans per month, and that this level of lending would be sufficient for each of the OMB’s to be viable.
Additionally, the OMB’s alleged that BOQ had engaged in misleading and deceptive conduct by failing to disclose various facts concerning the performance of other OMB’s, either before or after the franchisees entered into franchise agreement.
Notably, the majority of OMB’s had never achieved new lending totaling $4 million per month. The OMB’s argued that had these facts been disclosed then the relevant OMB would not have continued to trade and suffer the losses it did.
In response, BOQ denied that many of these representations were ever made. Moreover, the BOQ denied that the pleaded representations were mere representations of the future and argued that they had reasonable grounds for making the representations.
BOQ sought payment of outstanding loans, orders for possession and damages against Traderight on the ground that they failed to reimburse BOQ for bad debts.
The Court was not satisfied that the OMB’s had established that BOQ engaged in misleading or deceptive conduct.
OMB’s claimed that many representations were made to speed up BOQ’s expansion. However, a business plan one of the OMB’s prepared in conjunction with BOQ acknowledged the lack of potential market knowledge and in a letter to the party BOQ said that if this was a major concern, they should reconsider their application.
Additionally, letters from BOQ emphasised to applicants that they needed to seek independent legal and financial advice.
Justice Ball found that, “The overall impression created by the correspondence from the Bank and the requirement to prepare a business plan was that the business was to be the OMB’s business and the OMB had to make an assessment of whether the business would generate profit and if so, whether that profit was acceptable to the applicant.”
The Court was not convinced that a number of alleged representations had in fact been made, or that the OMBs had relied on many of the representations.
Claim 2: Unconscionable conduct
The OMB’s argued that the BOQ was in contravention of sections 51AA and 51AC (unconscionable conduct) of the TPA. The main reasons being that BOQ was in a position of special knowledge placing the OMB’s at a disadvantage due to:
asymmetric information (by failing to disclose certain matters such as the history of its OMB business in Queensland and the nature of the investigations BOQ had taken in relation to its interstate expansion);
unequal bargaining power between the BOQ and the OMB’s in regards to the terms of the OMB agency agreement;
the termination clauses within the franchise agreements (and the consequences that would flow from them) were unconscionable;
lack of support offered from BOQ; and
the “Representations Deed” was unconscionable (as its purpose was to prevent claims being made against BOQ, even though the OMBs had been misled).
This special disadvantage, the OMB’s argued, meant BOQ should not have acted in the way that it did.
In regards to asymmetric information, the Court pointed out that there is an asymmetry of information in most commercial transactions. In order to be unconscionable BOQ must have taken advantage of a disability or disadvantage of the OMBs.
The Court pointed out that the OMBs knew BOQ was expanding interstate, that it was relatively unknown in the NSW market, and that its model had not been tested in that market. They were also invited to undertake their own enquiries, which they did. Justice Ball said of the OMBs, “They were in a better position than the Bank to assess their ability to attract customers”.
The Court found that BOQ had given the OMBs extensive information concerning the performance of other branches once the OMBs had opened up their own branches.
In regards to inequality of bargaining power, the Court was not satisfied that there was any significance to the BOQ’s insistence that it would not agree to changes to OMB documents. The BOQ never refused to answer questions and in fact made changes to the commission structure to compensate OMBs for increased expenses.
Other difficulties the Court had with the OMBs unconscionable conduct claims was that:
they did not identify how BOQ took advantage of their argued disability or disadvantage;
many of their pleadings did not identify any conduct at all;
it was often unclear what loss OMB were alleging to have suffered as a result of the supposed unconscionable conduct.
Regarding the “Representations Deed”, the OMB parties were required to obtain independent legal advice, which they did, so the Court was not satisfied there was unconscionable conduct in that instance either.
Claim 3: Negligence
This claim had two aspects. Firstly, the OMB’s claimed that BOQ was liable for negligence misstatement. This claim was limited to a claim identified as a ‘viable business representation’. The BOQ was argued to have a duty of care to take reasonable care in supplying the OMB’s with information concerning the franchise.
Secondly, it was alleged that some OMB’s suffered from psychiatric injury as a consequence of BOQ’s conduct. It was alleged BOQ owed a duty of care to prevent that injury and therefore they breached this duty.
In regards to the alleged negligent misstatement, the Court was not satisfied that this claim could succeed when the claim based on misleading and deceptive conduct failed. Similar reasoning to the misleading and deceptive conduct claim was given, e.g. that the Court was not satisfied that many of the representations had actually been made and/or that the representations were in fact relied upon.
Regarding the ‘psychiatric injury’, the Court was not convinced that BOQ owed the OMB’s a duty of care not to cause them to suffer from psychiatric injury. One of the reasons for this was that this was a commercial relationship with terms of agreement that made it clear that the OMB bore the risks of possible failure of the franchise.
The Court also noted that it was not uncommon for people to suffer from financial hardship, and associated stress, where there is a failure of a business venture. However, this would not normally extend to an expectation of psychiatric illness.
Claim 4: IR Act
Some parties claimed that the OMB Agency Agreement and associated agreements, the Pre-Opening Agreement and arrangements between BOQ and the OMB’s were unfair under section 106 of the IR Act. Various reasons were given for this assertion, however, for the most part they were said to be unfair for similar reasons why it was alleged the bank had engaged in unconscionable conduct.
In relation to the Pre-Opening Agreement and arrangements between BOQ and the OMB’s, the Court was not satisfied that they were unfair, harsh or unconscionable as required under section 106 of the IR Act. The OMB’s had alleged that the pre-opening representations were misleading and deceptive and thereby caused them to enter into an agreement under which they sustained loss. This aspect of the claim failed because the OMB’s had not proven that the representations were actually misleading or deceptive.
The Court also rejected the claim that the OMB Agency Agreement was unfair. The OMB’s had alleged, essentially, that the OMB Agency Agreement was unfair because the Bank did not have reasonable grounds for believing that a viable business could be established in New South Wales. While recognising that the risks might have been greater than anticipated by the bank and the fact that the business clearly turned out to be a failure, the Court was not of the opinion that this made the contract or arrangement unfair.
Each of the claims brought by the OMB’s were dismissed.
The Court also gave judgment in favour of BOQ for the amounts against each OMB party who was liable in respect of the relevant loans.
Of particular significance to franchisors is having clear documentation, good records and facilitating potential franchisees seeking independent advice. These points came up consistently throughout the case in BOQ’s favour.
For franchisees it is important to use the initial stages of the franchise relationship to obtain as much information as possible, obtain independent advice and use their own business knowledge to make a properly informed decision as to whether they wish to proceed.