FCA NFC SEMINAR PAPER

FRANCHISING – CASE UPDATE – 9 OCTOBER 2016

Ben Coogan, Partner, Thomson Geer Lawyers

CASE UPDATE 2016

Guirguis Pty Ltd & Ors. -v- Michel's Patisserie System Pty Ltd & Ors [2016] QDC 117 (delivered on

27 May 2016)

1 The above case is one of the most recent franchising decisions in Queensland that was heard

in the District Court of Queensland over the course of nine (9) days before Judge Koppenol.

2 In the interests of disclosure, my firm (but not me) acts for the franchisee. This paper does

not go beyond what the judgment identifies or my personal opinion on the judgment.

3 The facts as set out in the judgment are quite limited. In short, the case concerns the

Michel's Patisserie franchise business at a shopping centre in Townsville. The former

franchisee brought a claim against Michel's Patisserie (essentially Retail Food Group - RFG)

for misleading or deceptive conduct under the Australian Consumer Law and under common

law for alleged negligent mis-statement and breach of contract seeking damages of

$634,429.85. A counterclaim was brought by the first and third defendants against plaintiffs

for $650,552.24.

4 The franchisee abandoned the franchise premises on 18 July 2013 and never returned. The

Franchise Agreement was to continue until 2022.

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5 By letter dated 22 July 2013, the franchisee purported to terminate the agreements. The

Franchise Agreement empowered the plaintiffs to do so only if they were 'in compliance

with [its provisions]'. At that stage, the plaintiffs owed more than $31,000 to RFG for unpaid

fees and levies.

6 Then, by letter dated 25 July 2013, RFG itself terminated the agreements and excluded the

plaintiffs from the premises. That was based upon the plaintiff's fundamental breach of their

contractual obligations by abandoning the franchise and business.

7 The plaintiffs did not dispute the validity of RFG's termination, in the event that their own

termination was found to be invalid.

'No Transaction' Case

8 The Court identified that the franchisee's primary claim is a 'no transaction' case – that is,

that the franchisee would not have entered into the franchise business and related

agreements but for RFG's alleged misleading or deceptive conduct.

9 The Court identifies that the misleading or deceptive conduct is said to have been:

(a) the making of false representations; and

(b) the failure to disclose certain important matters.

10 The representations alleged were that regular deliveries from Brisbane to Townsville in

freezer trucks of snap-frozen product which would maintain its quality once thawed would

not be a problem. They were said to have been made by Mr Metzakis (RFG's agent) and Mr

Dellit (RFG's employee).

11 The failure to disclose allegation concerned the defendant's silence about a number of

matters regarding uncertain future supplies from the Brisbane bakery, Dysons.

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12 Koppenol DCJ did not set out what the representations were pleaded to be, or with precision

as to who was said to have made them or whether they were made in correspondence or

other documents or otherwise.

13 The judgment then quickly moves to the issue of reliance which was a key issue in

contention in this case.

14 Koppenol DCJ found that the issue of reliance was not made out based on the following

factors:

(a) the franchisee's Mr Guirguis was a person who decided whether to enter the

agreements or not therefore it was important to look at Mr Guirguis' evidence.

(b) Mr Guirguis' evidence was that was assessed by the Court as being by a mature and

educated man, who had held senior, highly-paid occupational health and safety

positions in the Resources and Construction Industries. He was not one to be rushed

or pushed into signing business agreements.

(c) neither Mr nor Mrs Guirguis identified in the Deed of Prior Representations or a

questionnaire form any of the alleged representations upon which they relied upon

in this case. The Court held that this was significant because 'an expressed

declaration by a person in a contractual document that they did not rely upon pre-

contractual representations may be evidence of a non-reliance and a want of a

causal link between the impugned conduct and any loss or damage flowing from the

entry into the contract'.1

(d) the Court also found that Mr Guirguis did not avail himself of the opportunity to

complete fresh questionnaires when asked by RFG to do so given the recording of his

1 Campbell v Backoffice Investments Pty Ltd [2009] 238 CLR 304 at [31]

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answers in the first questionnaire, nor did he otherwise inform RFG that he did not

properly or accurately complete the questionnaire.

(e) the Court found that Mr Guirguis "knew full well what was being asked of him in the

questionnaire but disingenuously attempted at the trial to convey a contrary

impression. If he relied upon or was influenced by the things that he said to

Mr Metzakis and Mr Dellit had told him – things that he said at the trial were so very

important to him, he would have written them down on the form provided. He did

not. He and his wife sought and obtained legal advice, including about the

questionnaire. They reflected on the franchise proposal and carefully read the

documents again before signing them. They were then given the further opportunity

to correct any inaccurately or inadequately completed answers in the original

questionnaire. Mr Guirguis could have set out details of the defendant's alleged

representations. So could Mrs Guirguis. They had that second opportunity but they

remained silent".

Abandonment and Termination

15 As identified above, the plaintiffs abandoned the franchised premises 9 years before it was

to expire.

16 By letter dated 22 July 2013, the franchisee purported to terminate the agreements. The

Franchise Agreement empowered the plaintiffs to do so only if they were 'in compliance

with [its provisions]'. As a result of the franchisee owing $31,000 to RFG, the Court found

that because of the payment non-compliance, the power to terminate did not then exist.

Consequently, the reported termination was invalid and of no effect.

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17 Then, by letter dated 25 July 2013, RFG itself terminated the agreements and excluded the

plaintiffs from the premises. That was based upon the plaintiff's fundamental breach of their

contractual obligations by abandoning the franchise and business.

The Failure to Disclose

18 The franchisee alleged here that the defendants knew that prior to the plaintiff's entry into

the agreements, the defendants did not disclose certain information to them:

(a) as at 23 March 2012, there were no companies currently able to manufacture and

supply the product to the Michel's Patisserie system and achieve the requirements

of the system;

(b) as at 23 March 2012, bakeries across Australia had not been able to meet their

contractual requirements and operate and produce products for Michel's Patisseries

stores;

(c) as at 16 February 2012, the Dysons Bakery, being the suppliers of 56 Michel's

Patisserie franchisees were in financial difficulty and unable to meet orders for

Mr Connors (RFG) and RFG had deliberately refrained from enquiring as to Dysons

solvency, 'preferring not to ask';

(d) as at 2 April 2012, Dysons had been placed in administration, which outcome was

the 'worst case scenario' and that it would result in many disgruntled franchisees'.

19 Koppenol DCJ held that the evidence did not establish the franchisee's allegations for the

following reasons:

(a) it is 'nonsense to say that prior to 26 March 2012 (the date on which the plaintiff's

entered into the agreements), the defendants knew or could have known something

as at 2 April 2012'.

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(b) paragraphs (a) to (d) above effectively allege a failure to supply product at all and

not an inability to supply product from Dysons Bakery. There was no evidence that

when the agreements were signed on 26 March 2012, there were any acute

problems with supply to Townsville.

(c) as previously found, the franchisee did not enter into the agreements in reliance

upon and induced by any representations about the location of the manufacturing

bakery – and specifically, that product would be supplied from Brisbane. In any

event, by the time the franchise business commenced operation on 28 May 2012,

the disruption caused by Dysons Bakery problems had been remedied as the

products were coming out of a bakery in Sydney.

(d) finally, an obligation to make post-transaction disclosures would change the nature

of the 'no transaction' cases pleaded by the franchisees.

Negligent Misstatement and Breach of Contract

20 The Court found that the franchisee's claims for negligent misstatement and breach of

contract were unmaintainable because they were expressly excluded by clauses contained in

the Franchise Agreement. These clauses stated the plaintiff's 'release and forever hold

harmless' the defendants:

'… from all actions, suits, proceedings, claims, demands, costs, expenses and/or

damages, at law or in equity, pursuant to contract, tort … or otherwise, which but for

this clause they now have, or had at any time previously, or might have in the future

whatsoever or howsoever arising out of or in connection with:

… any failure by a manufacturer, producer or supplier approved by the [first

defendant] franchisor to meet the standards specified in clause 5.7(a)(ii) hereof …'

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21 Clause 23.10 of the franchise agreement provided that the plaintiffs 'acknowledge and

agree' that:

'(e) the [defendants] shall not be liable to the [plaintiffs] in connection with any

loss or damage, which may be suffered by them in connection with the

supply or non-supply of Products (including Michel's products) to the

[plaintiffs] by parties other than the [defendants].'

22 Therefore, the Court held that even if the claims could be made out, the parties' agreements

precluded any monetary recovery.

RFG's Counterclaim

23 The remainder of the judgment focusses on the analysis of the RFG's counterclaim. As

identified previously, the RFG defendant's counterclaim was for $650,552.24, as follows:

(a) as against the first plaintiff company – for breaches of the Franchise Agreement and

the Outlet Licence Agreement, for franchise service fees, marketing levies, rent and

outgoings, the costs of surrender of the lease and for the removal of plant and

equipment;

(b) as against Mr and Mrs Guirguis – on their guarantees of the company's obligations to

RFG.

24 By oral submissions, the franchisee argued that RFG's decision to operate the store for a

period and to freely use the franchisee's plant and equipment after it had abandoned the

premises constituted an intervening event, which:

(a) precluded any claim in respect of the balance of the lease term; and

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(b) absolved the franchisees from any further liability under the Franchise Agreement,

and related agreements.

25 The Court rejected that argument on the basis that it had not been pleaded and the plaintiff

had not cited any case authority to support it.

26 The franchisee also submitted that RFG's quantum calculation was defective and unreliable

because its accountant who prepared the calculation erroneously prepared mere forecast

estimates rather than an accurate statement based upon his examination of the relevant

books and records.

27 The Court held that while RFG's accountant used the word 'estimate' in his evidence, it was

clear from the way in which he described the exercise which he undertook in that he

precisely did what clause 11.4 of the Franchise Agreement required. That is, RFG's

accountant did not make an estimate but rather calculated the relevant figures for fees and

levies based on past average weekly sales. Further, the Court accepted RFG's submissions

that while his calculation of future weekly sales was an estimate, it was a precise

mathematical calculation.

28 The Court rejected the franchisee's submissions that because the accountant could not recall

the precise clause number or form of agreement, all because his calculation instructions

were not in evidence, he was not discredited.

29 The Court also rejected the franchisee's contentions made in oral submissions (and not

pleaded) that the quantum calculation:

(a) failed to account for (or in other words they should have received a credit for) their

bank guarantee which was forfeited, the time that RFG benefitted from operating

the store, and any salvage related to plant and equipment;

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(b) failed to take into account the present value of money and forecasts. The Court did

so on the basis that clause 11.4 of the Franchise Agreement prescribed the method

to be used in calculating the quantum of RFG's loss and damage and it made no

provision for the calculated total to be reduced or adjusted as contended by the

franchisee.

30 Accordingly, the Court dismissed the franchisee's claim and gave judgment to the first,

second and third defendants on their counterclaim for $650,552.24.

Key Points taken from this Case

31 Whilst the law has recognised that it is not always appropriate to expect that the ‘word’

given by one of the parties to be able to be enforced, the Court in this case was clear in

finding that the franchise agreement entered into was enforceable and the plaintiff could

not extract itself from it and its effects.

32 Therefore, the Court made it clear that to be successful in a representation claim, a

franchisee needs to have relied on the specific representations made at the time of entrance

into the agreement.

33 In saying that, it is important to note that this decision was just eight (8) pages in length

(once the cover page and case citations were removed), which is unusual for a hearing

lasting nine (9) days in which allegations of misrepresentations were said to have occurred.

34 Unsurprisingly, the franchisee has appealed citing some 13 grounds.

35 I have had the opportunity to read the Notice of Appeal and the Notice of Contention, which

are public documents and have been filed in Court. In the Notice of Appeal, some of the

obvious grounds are that the trial judge erred in law in that he failed to find whether or not

the representations or any of them were made by the defendants of any of them and failed

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to find whether or not representations or any of them were misleading or deceptive. There

is also criticism of the judgment's lack of clearly identifying the pleaded representations.

36 At the time of writing this paper, the appeal has not been heard. The appeal has been set

down for hearing over two days commencing on 27 September 2016. I will hopefully have

more details by the time I present at the legal symposium.

Civic Video Pty Ltd -v- Paterson [2016] WASCA 69 [27 April 2016]

37 The background to this decision is really a struggling franchisee under an aging franchise

product model (Civic Video) and then the involvement of a competing video store (Video

Ezy) in Geraldton, Western Australia.

38 The trial judge's decision was delivered in 2014.

39 Aside from considering the factual circumstances and a claim by Civic Video regarding the

tort of inducing a breach of contractual relations, the Western Australian Court of Appeal

also reviewed the principles that are applicable to assessing damages for repudiation of an

agreement.

The Key Facts

40 Civic Video Pty Ltd (Franchisor) and the Thompsons (Franchisee) entered into agreements

under which the Franchisee would operate two stores using the Civic Video System

(Franchise).

41 Franchisor consent was required in order for the Franchisee to sell, assign or transfer any

interest in the Franchise business or any rights under the Franchise agreements.

42 The Franchisee was required to pay a monthly franchise fee to the Franchisor under the

Franchise Agreements.

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43 The Franchisee fell behind in their payment of Franchise fees.

44 The Franchisee listed the stores for sale through a business broker, Mr Smith.

45 The Franchisee entered into an agreement to transfer all of their plant and equipment,

excluding trade supplied equipment, to a competitor of the Franchisor (a prospective

purchaser) so that the Franchisee would cease running the Franchise business. The

Franchisee did not obtain the Franchisor’s consent before doing so. This sale did not

proceed.

46 Later, a Mr Paterson took over the Head Lease of the complex that the Franchisee was

trading at.

47 Mr Paterson made written offers to the Thompsons to purchase the assets of each of the

two stores owned by the franchisee.

48 At trial, Mr Paterson gave evidence that it was his intention in acquiring both businesses to

consolidate them into one Video Ezy business on the highway store premises so that, with

his existing Video Ezy store, he would then have two strong Video Ezy stores in Geraldton.

The Primary Judge's Decision

49 The primary judge found that the conduct of the Franchisee constituted a repudiation of the

Franchise agreements.

50 In assessing damages, the primary judge found that at the time of the repudiation the

Franchisee could not continue trading due to their financial position.

51 Accordingly, the primary judge found that the Franchisor would not have received any

further Franchise fees from the Franchisee even if they had not repudiated the Franchise

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agreements in the manner that they did. Therefore, the primary judge found that there was

no loss suffered by the Franchisor in this manner.

52 The primary judge assessed damages only on the basis of the loss of opportunity of the

Franchisor finding another purchaser for the stores or the Franchisor itself taking over the

stores. This opportunity was denied to the Franchisor by the Franchisee’s breach of the

Franchise agreements.

53 The primary judge identified the elements of the tort of intentional interference with

contractual relations were as follows:

(a) There must be a contract between the plaintiff and a third party;

(b) The defendant must know that such a contract exists;

(c) The defendant must know that if the party does, or fails to do, a particular act, that

conduct of the third party would be a breach of the contract;

(d) The defendant must intend to induce or procure the third party to breach the

contract by doing or failing to do that particular act; and

(e) That breach must cause loss or damage to the plaintiff.

54 In relation to that aspect, the primary judge concluded that Mr Paterson did not know, one

way or another, whether the sale of the businesses to him would be a breach by the

Franchisee of the Franchise Agreements. While the primary judge considered that

Mr Paterson had grounds to suspect that by selling the businesses the Franchisee might be

in breach of the Franchise Agreements, he concluded that the suspicion did not amount to

reckless indifference or wilful blindness. He therefore rejected the claim against

Mr Paterson in relation to the tort of interference of contractual relations.

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Issue before the Court of Appeal

55 The Franchisor appealed the primary judge’s decision. The Franchisor argued that the

damages should have been assessed on the basis of the Franchisor’s loss of bargain rather

than its loss of opportunity.

56 The Franchisor alleged that the primary judge erred in finding that Mr Paterson did not

induce the Franchisee to breach their Franchise Agreements with the Franchisor.

The Court of Appeal Decision

57 The Court of Appeal found in favour of the Franchisor in relation to the issue of damages,

but against the Franchisor in relation to its allegation that Mr Paterson induced the

Franchisee to breach their Franchise Agreements.

Did Mr Paterson induce the Franchisee to breach their Franchise Agreements?

58 Civic Video attacked two findings of fact of the primary judge; namely that Mr Paterson did

not know the sale of the businesses by the Franchisee would breach their Franchise

Agreements, and that Mr Paterson did not intend to induce or procure the Franchisee to

breach the Franchise Agreements for the following reasons:

(a) while Mr Paterson did not receive a copy of the Franchise Agreements, he was

experienced in the operation of video stores pursuant to Franchise Agreements (due

to his operation of Video Ezy franchised businesses) and was aware that the

Franchise Agreements generally had the provision requiring the Franchisor's consent

for early termination;

(b) there was evidence from Mr Paterson's enquiry of the business broker as to Civic's

attitude to the sales that Mr Paterson was alive to the fact that the Franchisee might

be breaching the Franchise Agreements;

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(c) the inclusion of an indemnity in the Sale Agreement to protect Mr Paterson is an

acknowledgment that the sale of the businesses by the Franchisee would be in

breach of contract;

(d) the fact that Mr Paterson was prepared to pay $500,000 for the two stores, one of

which he was going to close, in circumstances where he was aware the Franchisee

were impecunious and could not continue in business, demonstrated that the

acquisition was for competitive reasons, to ensure that Civic Videos stores ceased to

operate in the Geraldton area.

59 The Court of Appeal focussed on the fact that an appellant who seeks to overturn findings

and facts which depend to any substantial degree upon credibility assumes a formidable

burden.

60 The Court accepted that the primary judge's finding that Mr Paterson agreed to acquire the

Head Lease of the Durlacher Street complex at a time when a previous purchaser's

agreement to acquire the Franchisee's business was still on foot, and that Mr Paterson was

only approached about acquiring the Franchisee' business after the previous purchaser's

agreement was terminated and when he had agreed in principle to acquire the Head Lease

of the Durlacher Street complex.

61 The Court of Appeal found that the legal advice came from the business broker Mr Smith,

not the Franchisee with whom Mr Paterson had no contact. The Court of Appeal also found

that it was not inherently likely that Mr Smith did not know what the legal advice was and

had not concerned himself with the nature of the legal advice, but only whether or not it

meant the sales would be proceeding.

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62 In relation to the indemnity clause being inserted into the Sales Agreements, the evidence of

both Mr Paterson and Mr Smith (the business broker) was that Mr Paterson had not

requested it to be inserted and that it had been inserted by Mr Smith. The Court of Appeal

found that the fact that it operated in Mr Paterson's interest, rather than the interests of the

Franchisee, did not preclude the possibility that Mr Smith thought that it was an appropriate

provision to include in the Agreements.

63 In relation to the sale price, the Court of Appeal did not overturn the primary judge's findings

and noted that an argument to the contrary ignores the offer made some three weeks

earlier previous by the prospective purchaser for $405,000 plus stock valuation.

Damages

64 The Court of Appeal found that the Franchisor was entitled to 'loss of bargain' damages; that

is, damages to put the Franchisor in the position it would have been in if the Franchisee had

performed the Franchise Agreements – what, it has been suggested, might be better

described as 'hypothetical performance' damages.

65 The Court of Appeal found that as the Franchisor's case was advanced at trial, the

assessment of those damages did not involve any question of loss of chance and nor was it

relevant that, due to their poor trading results, the Franchisee may, or would, have been

unable to perform the Franchise Agreements for the balance of the term. The damages

remained, in the Court of Appeal's opinion, to be assessed on the basis of the amount that

the Franchisor would have received had the Franchisee performed the Franchise

Agreements for the balance of their respective terms.

66 In support of a Notice of Contention, as submitted by the Franchisee, that by virtue of

clause 10.2 of the Franchise Agreements the Franchisee were not required to conduct the

businesses throughout the term but only to use their best endeavours to do so. Therefore, if

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the Franchisee had not repudiated the Franchise Agreements they would have been unable,

even using their best endeavours, to continue to trade and would have closed their

businesses at that point. It was argued that this would have constituted voluntary

abandonment of the businesses, for which the Franchisor's only remedy would have been to

terminate the Franchise Agreements and given no right to damages for breach.

67 The Court of Appeal did not accept that argument.

68 The Court of Appeal found that on no fair reading of those provisions, in the context of the

Franchise Agreement as a whole, clause 10.2 be understood to mean that the Franchisee

were required to conduct the business only for so long as they were able to do so using their

best endeavours.

69 Further, the Court of Appeal found that the Franchisor's right to terminate if the franchise

voluntarily abandoned the business should not be read as giving a franchisee carte blanche

to walk out of the business at any time during the term without any liability for doing so.

70 The Court of Appeal remitted to the primary judge the assessment of the damages to be

undertaken according to law. However, the Court of Appeal commented on one aspect

where the primary judge took the view that Civic was not entitled to damages in respect of

the advertising fees which it would have received from the Franchisee had they performed

the Franchise Agreements.

71 The relevant provisions can be described as follows:

(a) Clause 5.2(b) of the Franchise Agreements provided that the Franchisee was to pay

to the Franchisor a monthly advertising fee calculated in accordance with that

provision.

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(b) Clause 15.1 provided that the Franchisor must credit all such fees paid by

Franchisees to the 'advertising fund' and separately account for them in its books

and records of account.

(c) Under clause 15.2, the Franchisor was required to develop and implement an

advertising, development and marketing program for the 'Civic Video System' and to

use the advertising fund to pay all expenses it thereby incurred. It further provided

that if at any time the advertising fund did not have sufficient credit to meet the

Franchisor's expenses, the Franchisor was not obliged to provide any advertising,

development and marketing program.

72 The Court of Appeal noted that it was significant that the advertising, development and

marketing program in which the fees were to be expended were for the 'Civic Video System'

generally and not specifically in relation to the Franchisee stores.

73 The primary judge found that if the Franchisor was awarded damages in respect of the

advertising fees it would be entitled to use those funds as its own and thereby be in a better

position than it would have been in if the Franchisee had performed the Franchise

Agreements. The primary judge concluded that Civic's claim in respect of the unpaid

advertising fees must therefore fail.

74 Significantly, the Court of Appeal found that the primary judge was in error in so finding. It

said that the Franchisor was entitle to enforce the Franchisee's contractual obligation to pay

to it all the advertising fees for the purposes of the advertising fund and following the

termination of the Franchise Agreement, to seek damages for the diminution of the funds

available to the Franchisor to develop and implement the advertising, development and

marketing program for the Civic Video System by reasons of the Franchisee' failure to

perform the Franchise Agreement.

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75 The Court found:

(a) the Franchisor was entitled to loss of bargain damages, to put the Franchisor in the

position it would have been in if the Franchisee had performed the Franchise

Agreements for their respective terms;

(b) those damages did not involve any question of loss of chance or opportunity on the

part of the Franchisor; and

(c) the poor trading performance of the Franchisee’s stores and the Franchisee’s

financial position prior to the repudiation were irrelevant to the assessment of loss

of bargain damages.

Key Points from this Case

76 This case emphasises that the consequences of repudiation can be severe. The Franchisee

may have had a much better outcome if they had obtained consent to assign first (if

necessary from the Court). Of course, there was no guarantee that the Franchisor would

have provided the consent, but the Franchisor would have been required to consider the

issue carefully before reaching its decision.

77 This case also confirms that it is very difficult to prove up a case based on the tort of

interference of contractual relations.

78 The assessment of damages in respect of advertising fees, in my view, seems to be a harsh

one for the franchisee.

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