The concept of misleading and deceptive conduct was recently dealt with by the Federal Magistrates' Court (the Court) in the case of Van Camp v Muffin Break.

Background

The franchisee in this case, Van Camp, purchased a Muffin Break outlet at the Forest Hill Chase Shopping Centre. It was the first outlet at the particular shopping centre. Van Camp alleged that Muffin Break engaged in misleading and deceptive conduct (contrary to section 52 of the Trade Practices Act). Van Camp argued that Muffin Break made a representation that the Forest Hill Chase Shopping Centre site was a suitable site for the establishment of a franchise outlet (which it wasn't) and made further representations regarding the projected sales Van Camp could expect over the initial months of trading (which did not eventuate).

In the franchise documentation executed by Van Camp, there were numerous acknowledgments that the documents were the full embodiment of the agreement and no representations were relied upon.

Findings

The Court found that the nature of the representations, when taken as a whole, were capable of distorting Van Camp's judgment. The representations distracted Van Camp (as they would any reasonable person in the circumstances) from the significance of the acknowledgements which were contained in the franchise agreement he signed. The documents were signed in rushed circumstances and this made them of limited value to the franchisor when using them to rebut their general contention that the representations alleged were never made.

The Court established that Muffin Break, through its employee, Brusch, engaged in misleading and deceptive conduct when it made representations about the projected sales figures. The Court commented that it was reasonable for a prospective franchisee to rely on a representation of this kind when deciding whether or not to enter an agreement to purchase a franchise. It also considered the fact that there were no reasonable grounds for making the representations, because firstly, Muffin Break denied they were made and secondly the subsequent financial performance of the Forest Hill Chase site suggested the representations were not reasonable. Additionally, it was noted that the site could not be reasonably represented as suitable because there was no proper process where the site was evaluated.

Van Camp was entitled to rescind the franchise agreement and licence agreement (from the time when the agreements were entered into with the respondent). Due to representations made by the franchisor's employee, the franchise agreement and licence agreement were void and the franchisee was entitled to act as if he had never signed them.

What this means for franchisors

  • Franchisors should not rush potential franchisees into signing documents.
  • Staff should be appropriately trained to avoid making representations, or to only make authorised representations.
  • Franchisors should not represent a site as suitable if they have not properly evaluated the site.
  • Franchisors cannot always rely on the existence of an acknowledgement clause in the franchise agreement, which states that neither party has relied on representations outside the document, to protect themselves from misleading and deceptive representations made.

Recommendations for Franchisors

  • Establish a suitable process to induct franchisees into the system which includes reasonable time for the execution of documents.
  • Conduct training of existing staff and incorporate into the induction of new staff information about Trade Practices obligations to assist staff to recognise, understand the importance of and to identify issues that arise in relation to representations.
  • Keep information which supports any representations made to franchisees and confirm in writing the substance of meetings held with franchisees.
  • Include an acknowledgement which is given by the franchisee as part of a separate document, incorporating questions so that franchisees must actively turn their mind to whether representations were made and positively state that they were not.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.