Case Update 2016 Ben Coogan Partner, Thomson Geer Lawyers

Guirguis Pty Ltd & Ors v Michel’s Patisserie System Pty Ltd & Ors [2016] QDC 117 [27 May 2016] Facts 9 day hearing before Judge Koppenol (District Court of Queensland) Former franchisee brought a claim against Michel’s Patisserie (RFG) for misleading or deceptive conduct / negligent mis-statement / breach of contract – $634,429.85 Counterclaim brought by RFG for $650,000 Franchisee abandoned premises 18/7/13 Franchise agreement was to continue until 2022 22/7/13 – franchisee purported to terminate the agreement but owed $31,000 to RFG 25/7/13 – RFG terminated the agreement based upon plaintiff’s abandonment of the franchising business

The Guirguis case (cont.) No transaction case The franchisee would not have entered into the franchise business but for RFG’s misleading or deceptive conduct Court identified that the misleading or deceptive conduct was alleged to be: the making of false representations (that regular deliveries from Brisbane to Townsville in freezer trucks of snap-frozen product would maintain its quality once thawed) failure to disclose certain important matters (including the defendant’s silence about uncertain future supplies from Dyson’s Bakery in Brisbane)

The Guirguis case (cont.) The court found reliance was not made out because: neither Mr nor Mrs Guirguis identified in deed of prior representations / questionnaire, any of the alleged representations upon which they relied upon in this case Mr Guirguis did not avail himself of the opportunity to complete fresh questionnaires when asked by RFG to do so 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’

The Guirguis case (cont.) Abandonment and termination Franchisee abandoned the franchised premises 9 years before it was to expire Franchisee’s purported termination when in breach of its provisions meant that the purported termination was invalid RFG’s termination was valid

The Guirguis case (cont.) Failure to disclose Franchisee alleged that the defendants knew prior to franchisee’s entry into the agreement but the defendants did not disclose certain information: as at 30 March 2012, there were no companies able to manufacture and supply the product as at 23 March 2012, bakeries across Australia had not been able to meet their contractual requirements and produce products from Michel’s Patisserie stores as at 16 February 2012, Dyson’s Bakery were in financial difficulty as at 2 April 2012, Dyson’s had been placed into administration

The Guirguis case (cont.) Koppenol J held: there was no evidence at the time the agreements were signed that Dyson’s Bakery were unable to supply product the franchisees did not enter into agreements on reliance upon and induced upon representations about the location of the bakery by the time franchise business commenced the disruption by Dyson’s Bakery had been remedied as products were coming out of Sydney an obligation to make post transaction disclosure would change nature of the no transaction case pleaded by franchisees

The Guirguis case (cont.) Negligent mis-statement and breach of contract Franchisees claims for negligence mis-statement and breach of contract were unmaintainable because they were expressly excluded by clauses contained in the franchise agreement Franchisee ‘release and forever hold harmless’ the defendants ‘from all actions, suits, proceedings… arising out of or in connection with… any failure by a manufacturer, producer or supplier approved by the franchisor to meet the standard specified in clause 5.7(a)(ii)’. Further clause 23.10 provided an acknowledgment and agreement that the franchisor was not to be liable for loss or damage suffered by the franchisee for supply or non supply of products

The Guirguis case (cont.) RFG’s counterclaim Franchisee attempted to argue that RFG deciding to operate the store post abandonment was an intervening event precluding any claim in respect of the balance of the lease term Court rejected that on the basis that it had not been pleaded and no case authority to support it Franchisee also submitted RFG’s quantum calculation was defective because the accountant who prepared the calculation only prepared mere forecast estimates

The Guirguis case (cont.) Court held: While RFG’s accountant used the word ‘estimate’ it was clear that he followed clause 11.4 of the franchise agreement and what it required

The Guirguis case (cont.) Key points taken from this case The court in this case was clear in finding that franchise agreement entered into was enforceable and the plaintiff could not extract itself from it and its effects. 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. Just 8 pages in length for a 9 day hearing Franchisee has appealed – citing 13 grounds – criticism of lack of reasoning in the judgment and lack of clearly identifying pleaded representations. Appeal was heard on 27 and 28 September 2016.

Civic Video Pty Ltd v Paterson [2016] WASCA 69 Court of Appeal (WA) 27 April 2016 Key facts Civic Video (franchisor) and the Thompsons (franchisee) entered into agreements to operate two Civic Video stores Franchisor consent was required for franchisee to sell, assign or transfer Franchisee had to pay monthly franchise fee Franchisee fell behind in their payment of franchise fee Franchisee listed stores for sale Franchisee entered into an agreement with a prospective purchaser but did not obtain franchisor consent. That sale did not proceed

The Civic Video case (cont.) A Mr Paterson took over the head lease of the complex that the franchisee was trading at Mr Paterson made written offers to the franchisee to purchase the assets of each of the two stores Mr Paterson gave evidence that it was his intention in acquiring both businesses to consolidate them into one Video Ezy business

The Civic Video case (cont.) Primary judge’s decision Conduct of franchisee constituted a repudiation In assessing damages, primary judge found at time of repudiation franchisee could not continue trading due to their financial position Franchisor would not have received any further franchise fee, therefore no loss suffered by franchisor – only claim damages for loss of opportunity In relation to the tort of intentional interference the Court concluded that Mr Paterson did not know whether the sale of businesses to him would be a breach by franchisee of the franchise agreements with Civic Video

The Civic Video case (cont.) Issue before Court of Appeal Franchisor appealed primary judge’s decision on essentially two grounds: damages should have been assessed on loss of bargain rather than loss of opportunity primary judge erred in finding that Mr Paterson did not induce franchisee to breach their franchise agreements with franchisor

The Civic Video case (cont.) Court of Appeal decision Paterson did not induce franchisee to breach franchise agreement Knowledge of franchise agreement? Indemnity and sale agreement to protect Paterson Paterson was prepared to pay $500,000 for two stores

The Civic Video case (cont.) Damages Franchisor entitled to ‘loss of bargain’ damages (hypothetical performance damages) Franchisor’s right to terminate if franchisor 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 liability Advertising fees – had to be paid monthly Franchisor must credit all fees paid by franchisees to the ‘advertising fund’ and separately account for them

The Civic Video case (cont.) The payment by franchisee were fees for the system as a whole and not generally in relation to the franchisee’s stores Franchisor entitled to enforce obligation to pay all advertising fees for purposes of advertising fund and to seek damages for diminution of funds available to franchisor to develop and implement advertising, development and marketing program for the Civic Video System by reason of the franchisee’s failure to perform the franchise agreement

The Civic Video case (cont.) Key points from this case Consequences of repudiation can be severe Franchisee had not obtained consent to assign agreement Very difficult to PROVE the tort of interference with contractual relations Assessment of damages, in my view, seems to be a harsh one for the franchisee

Questions? Ben Coogan Partner Thomson Geer