Home » Lenard’s Case – franchise disclaimers and acknowledgements

The Full Court of the Federal Court has warned that franchisees may be sued if they wrongly complete standard franchise documents.

In the Lenard's case[1] the Court considered that

"a case may one day arise in which it will be necessary for a court to decide whether a corporation that knowingly executes a contract that contains clauses [stating that they did not rely on any representations other than those contained in the franchise agreement] will be found to have contravened section 52 of the Trade Practices Act (TPA) should its conduct in doing so prove to be misleading."[2]

The decision also confirms a long line of authority that purchasers of a business who take their own independent legal and accounting advice in relation to the performance of the business may find it more difficult to establish that they relied on representations made by the seller, either prior to or at the time of purchasing the business.[3]

The dispute arose out of the acquisition of a Lenard’s franchise by a Mr and Mrs Baker. They alleged that Lenards and their master franchisee had engaged in misleading and deceptive conduct by making two material representations in the documents given to them before they signed the Franchise Agreement. One of the representations was made in relation to the sales/profitability of the business. The Court found that separate representations were made to the effect that:

(a) provided Mr and Mrs Baker complied with the Lenard’s system, the store could achieve a weekly gross sales target of $8,000 per week and a net operating profit of $50,000 per annum;

(b) a minimal performing Lenard’s shop selected by the master franchisee would produce a weekly gross sales figure in the order of $8,000 per week and an annual net operating profit in the order of $50,000, and that a higher performing shop would produce considerably higher outcomes.

The Court followed the recent High Court authority in Butcher v Lachlan Elder Realty[4] and considered that in determining whether or not a corporation has contravened s 52 of the TPA:

1. Although s 52 cases are always decided on their facts, the question is one of mixed fact and law.


2. The whole of the relevant conduct must be considered having regard to the circumstances in which that conduct took place.


3. In particular, the conduct in the period leading up to the signing of the Franchise Agreement, not merely the construction of individual documents, must be considered.
[5]

4. The question is not necessarily answered by asking whether someone was in fact misled, although evidence to that effect might be highly relevant.

The master franchisee provided a number of documents to Mr and Mrs Baker before they signed the Franchise Agreement. Those documents contained a number of statements to the franchisor by the franchisee, which have become almost standard in franchise documents, including:

"I acknowledge that:
1. I have undertaken, or will undertake, my own investigations about the proposed franchise business and its potential for me;


2. I have taken or will take independent legal, accounting and/or franchising consultant advice; and


3. I have not relied and will not rely upon this material.


4. I understand that the figures contained in this document are given as a sample only and do not constitute forecasts. After having obtained professional advise [sic] and made my own independent inquiries I will choose my own target figures."
[6]

A number of acknowledgements and disclaimers, which were in a similar form to many which now appear in franchise documents, were included in the material. For example, those included:

"Neither Lenards nor any other persons guarantees your success, the gross sales or profitability in the franchised business. These matters are subject to a number of factors which are beyond the control of Lenards including (but not limited to) the following: ..."

Thereafter fourteen factors are identified including the location of the shop in the shopping centre, the location and catchment area of the shopping centre and the other tenants of the shopping centre.[7]

"Projected operating profit is determined by many factors including location of the store, commitment of the franchisee, gross sales, rent and occupancy costs, wages and other miscellaneous costs. [8]

"There is no guarantee that a franchisee will achieve the same results as contained in any targets given, nor is it intended that a franchisee should rely on them as a projection. A franchisee is required to make his/her own inquiries and investigations and is to satisfy himself/herself as to potential sales, income and gross/net profits."[9]

Finally, the Franchise Agreement required that the franchisees obtain independent legal and accounting advice in relation to the agreement, including certificates signed by both their lawyer and accountant stating that they had advised the franchisees about the terms of the agreement and the risks associated with entering into the business in the following terms:

"Before signing any contracts Lenards will require that you seek professional legal and accounting advice. Lenards invite your solicitor and accountant to contact either Lenards or its company solicitors direct regarding any queries. We highlight the importance of the involvement of your expert advisers to ensure that all questions are answered and that any potential for misunderstanding is eliminated."[10]

Misled or Deceived?

The issue of whether the conduct of the master franchisee was misleading or deceptive was required to be determined by reference to what a reasonable person in the position of Mr and Mrs Baker would have made of those documents.[11]

Mr and Mrs Baker were found to be mature individuals who took the appropriate investigations before they bought into the business, including seeking the legal and accounting advice which had been recommended by the franchisor.

The Court found that, based on all of the material which had been provided to Mr and Mrs Baker, no reasonable person could have been misled to believe that Lenards had represented that any particular weekly level of gross sales or net operating profit would be achieved. Rather, all of the statements in the franchise material lead to the conclusion that Lenards was not giving any guarantees or assurances as to the turnover or profitability that Mr and Mrs Baker would experience as a franchisee.

Put simply, the Court found that Lenards were entitled to rely on the statements of Mr and Mrs Baker that no representations had been made to them "that the Franchised Business [would] be successful and produce turnover, gross or net profits at any level or rate or at all."[12] The positive and numerous representations which the franchisee had made to the franchisor prompted the Court to say that it was possible to envisage a franchisor may one day have an action against a franchisee for making misleading statements when entering into a franchise agreement.

Franchisors often incur considerable cost in locating and establishing stores, advertising and training costs. They may also find it difficult to cut all financial ties with the franchisee and third parties if the store fails. No doubt those are the type of costs which the Court had in mind for such a claim (or counterclaim).

Future Matters and the Question of Reliance

The Court considered that the sales/profitability representations were as to future matters. Accordingly, the reverse onus which is imposed by section 51A of the Act applies.[13] However, as the franchisor's conduct was not misleading and deceptive, it was not necessary for the Court to consider whether there was a reasonable basis for the representations.

For similar reasons, the Court was not required to decide whether Mr & Mrs Baker had relied on the representation.

As reliance is a question of fact, the existence of an exclusion or qualification clause is relevant to determine whether an applicant has established reliance. The Court said that, if they had been required to decide, the suggestion of reliance on profitability assessments is quite inconsistent with the applicants’ numerous written acknowledgments to the contrary and a finding of reliance on the sales/profitability representation could not be sustained.

Causation

Finally, the Court reasoned (although again they were not required to decide), that Mr and Mrs Baker did not seek the advice of their solicitor or accountant as to the accuracy, reliability or reasonableness of the information provided in the disclosure documents. It may well be that their failure to do so amounted to conduct which destroyed any possible causal connection between a contravention of s 52 and loss or damage.[14]

Conclusion

The Court has poured cold water over claims by franchisees who fail to consider the terms of the franchise documents which they sign. In particular, it is now clear that franchisees who seek to recover their loss from the franchisor where their franchise fails, must carefully consider the effect of the representations which they make to the franchisor when entering into the franchise agreement.

Franchisors will take comfort from the decision, if they are confident in their standard franchise documents and the systems which they maintain for their execution. Franchisors may consider that it is an opportune time for those documents and procedures to be reviewed.

Franchisees should also be consoled that, where properly advised, (both prior to and when entering into franchise agreements), their interests are sufficiently protected.


Footnotes
[1] Poulet Frais Pty Ltd v The Silver Fox Company Pty Ltd [2005] FCAFC 131
[2] Paragraph 83 of the judgment
[3] However, if a plaintiff did rely upon a defendant's misrepresentations, the mere fact that the plaintiff also relied on independent advice does not, as a matter of law, displace the conclusion: Charter Pacific Corporation Ltd v Belrida Enterprises Pty Ltd & Ors [2002] QSC 254. See also Gould v Vaggelas (1985) 157 CLR 215
[4] [2004] HCA 60
[5] Butcher v Lachlan Realty at [36]-[37] per Gleeson CJ, Hayne and Heydon JJ)
[6] Paragraph 61 of the judgment
[7] Paragraph 60 of the judgment
[8] Paragraph 53 of the judgment
[9] Paragraph 56 of the judgment
[10] Paragraph 54 of the judgment
[11] Butcher v Lachlan Realty at [50]-[51]
[12] Paragraph 81 of the judgment
[13] Section 51A(1) of the Trade Practices Act provides where a corporation makes a representation with respect to any future matter (including the doing of, or the refusing to do, any act) and the corporation does not have reasonable grounds for making the representation, the representation shall be taken to be misleading.
[14] See Henville v Walker (2001) 206 CLR 459 at [13] and [140]; see also I & L Securities Pty Limited v HTW Valuers (Brisbane) Pty Limited (2002) 210 CLR 109 at [85]