The recent franchise case of Dorrian & Anor v Rushlyn Pty Ltd & Anor [2013] FMCA 101 deals with a dispute between a South Australian State Master Franchisee and the Franchisor for the James’ Home Services franchise business.

Franchisee failed to prove representations were misleading or deceptive

The Franchisee’s directors alleged that the Franchisor made various misleading and deceptive representations, including that their draft business plan forecasts were realistic and that they would have no difficulty in achieving them.

The Court determined that the Franchisor’s director may well have expressed the view that the forecasts were realistic. However, the Franchisee’s directors failed to prove that the Franchisor’s director represented that there would be no difficulty in achieving the forecasts.

Further, even if the alleged representations were made, the Court would not have concluded that a reasonable person would have been misled or deceived in the circumstances where the franchise agreement had an entire agreement clause and the Franchisee’s directors:

  • performed the research and prepared the business plan;
  • were advised to seek professional advice;
  • agreed, in certain certificates, that the Franchisor was not competent to make a judgment about the commercial viability.

In respect of the other alleged representations, the Court determined that the representations that were made were merely introductory and not misleading or deceptive.

Franchisor failed to provide training in breach of the franchise agreement

The Franchisee’s directors alleged that they had been provided with only a third of the training which was a critical but unfulfilled term of the franchise agreement. It was alleged that the lack of training was a material cause of the failure of the business, and if the training had been given, they would have had a better chance of being in a position in which they had hoped to be as owners of a State Master Franchisee.

The Court determined that:

  • it was plain that the Franchisor did not fulfil the obligation in the franchise agreement to provide trainng for eleven months after the initial training;
  • the Franchisor’s breach entitled the Franchisee’s directors to terminate the franchise agreement, which they did by filing the application to commence the proceeding; and
  • the Franchisee’s director’s lack of improvement was caused by the insufficiency of the training which was provided to him.

The Court found that if the Franchisor had provided the training as promnised, the Franchisee’s director’s sales aptitude and sale ability would have significantly improved, which would have manifested itself in better sales.

The Court ordered that the Franchisee and its directors were entitled to damages of $545,792 and interest to the date of judgment of $113,201.40.

Franchisee failed to prove reliance on defective disclosure document

The Franchisee’s directors alleged that:

  • the Franchisor’s disclosure document was deficient because it did not disclose that up to fifteen Regional Master Franchisees in New South Wales and Victoria had ceased to operate between September 2006 and November 2008; and
  • had they been aware of this information, they would have made further enquiries and would not have entered into the franchise agreement unless given a satisfactory explanation by the Franchisor.

The Court determined that the Franchisor contravened section 51AD of the TPA by failing to include such information.

However, the Franchisee’s directors did not demonstrate what an unsatisfactory explanation would have been or whether the evidence before the Court indicated that the circumstances of the closures of the various franchises, whether individually or cumulatively, would or would not have been “unsatisfactory” and whether they would have proceeded with the transaction or not.

In the absence of evidence to the effect that the applicants would have acted differently if the omitted information had been supplied and also that they suffered identified loss and damage as a result of the omission, the Court found that there was insufficient factual basis to order relief in relation to the breach of section 51AD.

 

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