Click here to load reader
Upload
ngonhi
View
212
Download
0
Embed Size (px)
Citation preview
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.
1
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.
2
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]
3
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.
4
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'.
5
(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 …'
6
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
7
(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;
8
(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
9
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.
10
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
11
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.
12
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;
13
(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.
14
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
15
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.
16
(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.
17
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.
18