Court Finds Patiseirre Franchisor No Piece of Cake

by Andrew Lind on 20 April, 18

What Happened?

Last year The Queensland Court of Appeal in the case Guirguis Pty Ltd & Anor v Michels’s Patiseirre System Pty Ltd & Ors [2017] QCA 83, handed down a comprehensive decision regarding the seriousness of representations by Franchisors to potential Franchisees that may influence their decision to enter into a franchise agreement.

During preliminary negotiations Michel’s Patisserie made representations in relation to the frequency of delivery to Townsville and the cake quality upon arrival.  Before final execution the Franchisee was required to sign a Deed of Prior Representations, a questionnaire and a list of all information provided that influenced their decision to proceed with the Franchise Agreements.  The Franchisee did not list any information in relation to cake delivery or quality as a factor that influenced its decision to proceed.

The Law

The Franchisee applied to the Court for an order that the Franchise Agreement was void and should be set aside on the basis the Franchisor had made misrepresentations in relation to cake delivery and quality and failed to disclose a then current problem with supply of products.  It was alleged these misrepresentations and non-disclosure were a breach of the Australian Consumer Law (ACL), and amounted to misleading and/or deceptive conduct, which the Franchisee had relied upon when entering into the Agreement.

The ACL sets out all the legal requirements, remedies, and courses of action relevant for businesses and individuals that deal ‘in trade or commerce’.  Importantly, section 18 states:

A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.”

This section of the ACL covers conduct across a wide range of business activities including contractual agreements, other commercial negotiations, and advertisements. Conduct can also be described as making or giving a representation about the nature of something.

The Trial Judge

It was claimed by the Franchisee had been made aware of these issues regarding delivery and quality by the Franchisor they never would have entered into the Franchise Agreement.  The Trial Judge dismissed the Franchisee’s claims and held that the signed Deed of Prior Representation and completion of the questionnaire were sufficient evidence that the alleged misrepresentations had not been relied upon in executing the Franchise Agreement.

What the Appeal Court Found:

This finding was appealed by the Franchisee on the grounds the Primary Judge had erred in principle and at law by rejecting their claim that the representations and non-disclosure amounted to misleading and/or deceptive conduct under Australian Consumer Law and influenced their decision to proceed with the franchise.  The Court of Appeal ultimately decided for the Franchisee as the primary Judge had made a fundamental error in deciding causation without first finding what alleged conduct the Franchisor had engaged in and whether it was misleading.  The Appeal Court followed precedent set in Campbell v Backoffice Pty Ltd (2009) 238 CLR that:

 “neither the inclusion of an entire agreement clause nor the inclusion of a provision expressly denying reliance on pre-contractual representations [such as a Deed of Prior Representation] will necessarily prevent the provision of misleading information before a contract was made constituting a contravention of the prohibition against misleading or deceptive conduct by which loss or damage was sustained.”

Such conduct must be determined as a question of fact considering all the relevant circumstances, of which the written agreement is just one.  It was held that at first instance the Trial Judge failed to follow the appropriate test contained in precedent and the matter was referred to retrial.  The Appeal costs followed the Judgment in favour of the Franchisee, however each party would be required to pay their own costs in relation to the re-trial.

The Learning Curve:

It is illegal for any person or business to engage in conduct that either misleads or deceives consumers or other businesses, ‘or is likely to do so’.  This law applies even if there in no intention to mislead or deceive, nor anyone suffered a loss as a result of your conduct.

Whether certain conduct was misleading or deceptive is always a question of fact and is determined by looking at all of the relevant circumstances, of which terms of a contract are only one.  The conduct need not actually misled or deceive someone, in accordance with the working of section 18 it is enough the conduct was ‘likely to have’ misled or deceived.

There are multiple remedies available for contraventions of section 18 of the ACL:

  • Damages: Section 236 provides that a person who suffers loss or damage because of the contravention may recover the amount of that loss or damage. The action must be brought within six years of when loss or damage was suffered.
  • Injunction: An injunction is a court order that requires a person do something or refrain from doing something.
  • Compensatory orders: Section 237 gives a court power to make orders against the contravening person to compensate the person who has brought the claim, whether that person has suffered injury or is likely to.

Apart from the application of the ACL in this case, another key point is that even though documents have been signed that are evidence of pre-contractual representations, this may not necessarily exclude misleading and deceptive representations from being read by the Court.

The ramifications of contravening the ACL are significant. If you find yourself in the position of needing advice or have any question about Australian Consumer Law please contact our talented team at Corney & Lind.

Written by James Tan and Susie Donkin

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