The recent Federal Court decision in Pampered Paws Connection Pty Ltd (on its own behalf and in a Representative Capacity) v Pets Paradise Franchising (Qld) Pty Ltd (No 11) [2013] FCA 241 offers insight into the problems franchisees may face when attempting to recover against a franchisor for breaches of the Australian Consumer Law (ACL).

In July 2011 we reported the outcome of the ninth dispute between the two sparring parties,1 in which the court ordered that a written undertaking provided to the court between Pets Paradise Franchising (Qld) Pty Ltd (Pets Paradise) and Pampered Paws Connection Pty Ltd (Pampered Paws) be varied so as to permit Pampered Paws to execute a surrender of lease.

The tenth decision2 in the series of disputes was handed down in 2012, and found that the majority of the misleading and deceptive conduct alleged by Pampered Paws was unfounded. The only representation made by Pets Paradise that could be made out was the way in which the franchisees were required to pay upfront for stock allocated to them by Pets Paradise’s major supplier. However, it was still not clear to the court whether Pampered Paws had in fact suffered any loss as a result of the representation.

The most recent case illustrates that where a breach has occurred, the Courts will closely examine the conduct of the franchisee to determine whether they were relied on the representations made by the franchisor and whether they suffered loss as a result.

While proof of loss and causation is required under the legislation, the depth and degree of scepticism applied by the court will turn on the evidence adduced.

As this case demonstrates, inadequate financial records and lack of documentation of concerns expressed at the time of the alleged wrongful conduct have the potential to result in the dismissal of a claim.

Facts

Pets Paradise, the franchisor, entered into franchising agreements with a number of companies including Pampered Paws. Under the franchising agreement, Pampered Paws was required to enter into a Supply Agreement (Agreement) with a wholly owned subsidiary of Pets Paradise, Global Pet Products Pty Ltd (Global). Under the Agreement, Pampered Paws was required to take allocated stock from Global.

The disclosure document Pets Paradise had supplied Pampered Paws made no mention of the Agreement. However, the directors of Pampered Paws were made aware of the requirement to enter into the Agreement before they entered into the Franchising Agreement and again when they were undertaking training.

Pampered Paws signed the agreement and paid for the allocated stock while they were at training. On all of these occasions, Pampered Paws was in a position to withdraw from the Franchising Agreement. Under an associated agreement, Pampered Paws was also required to licence software from IT Visions Pty Ltd.

After several years of operation, Pampered Paws had recorded successive losses and faced a serious risk of continued loss into the future.

Decision

The Court found that Pets Paradise had engaged in misleading or deceptive conduct and breached the Franchising Code of Conduct.

Despite this, the court held that Pampered Paws had not relied on or suffered loss as a result of the representations made by Pets Paradise. Specifically, despite the failure to include the obligation to enter into the Agreement in the disclosure document, Pampered Pets was nevertheless aware of their obligation to do so.

It was not sufficient to claim damages merely on the basis of a breach. Moreover, the applicant is required to demonstrate that they relied on the relevant breach in such a way that, as a result, they suffered an actual loss. While courts are inclined to infer reliance upon a misleading representation, Pets Paradise had sufficiently discharged this presumption by bringing the Court’s attention to other instances where the relevant disclosures were made.

The Court found that Pampered Paws had the option to leave the franchising agreement on numerous occasions where the agreement obligations with Global had been brought to their attention.

Requirements for successful claim

The need to show reliance

As this case demonstrates, it is not merely sufficient for an applicant to show that a franchisor has breached the Code, or engaged in misleading or deceptive conduct. The applicant must be able to demonstrate that relied on this conduct and this reliance lead them to suffer loss.

The applicant must demonstrate that in the absence of the representation, they would not have acted in a certain way. Lack of documentation expressing Pampered Paws purported reliance and insufficient oral evidence on the part of the directors of the company contributed to the court’s conclusion that there had been no reliance in this case.

It must be established that the franchisee has relied on the representation and then suffered a loss as a result of the breach.

Here, the court found that the court found that no quantifiable loss had been established. Specifically, the court highlighted that the evidence required in proving a loss will depend on the nature of the loss suffered and the purported misconduct. Pampered Paws was unable to demonstrate that any of the losses it claimed were a result of Pets Paradise breaches.

Exclusive dealing

Pampered Paws also brought an action alleging the contravention of section 47 of the Trade Practices Act 1974 (Cth) (TPA) by the Franchisor engaging in the practice of exclusive dealing.

The Court held that Pets Paradise had engaged in exclusive dealing by offering to supply goods and services to Pampered Paws on the condition that Pampered Paws acquire stock from Global and acquire the IT Visions System from IT Visions.

Pampered Paws specified its losses as comprising of damaged and undelivered stock, allocated stock and freight costs.

The Court found that Pampered Paws had not suffered any loss as a result of exclusive dealing. The Court declined to make a declaratory order sought in relation to the contravention of section 47 of the TPA.

Conclusion

This case highlights the need for accurate and inclusive disclosure documents and training programmes that reflect the true reality of their business. All documents, including internal correspondence, should accurately and honestly describe franchising and supply arrangements. Franchisors ideally should have clear and reliable precontracting systems that are strictly followed. Even evidence from staff who have overseen the training of the franchisee pursuant to a proforma programme can be an effective evidentiary safeguard against claims. Adherence to these systems should be thoroughly documented and any notes from meetings, telephone conversations and emails between franchisor and franchisee should be recorded.

Further, any unusual statements made by the franchisee should be noted and responded to if considered appropriate.

Franchisees bringing claims need to obtain considered advice on what might be recoverable in pursuing any breach and what documents or other evidence they may have to demonstrate the reliance they place on any breaches and who other opportunities may have been open to them had they not relied on the representations and performed their franchise agreements.

Not all losses sufferred may be recoverable depending upon the type of claim made and commercial consideration of the expense of litigation may see strategic decisions adopted on what claims to bring and which to omit.