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A key tip for prevailing in a dispute or court case……Keep Good Records!

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By Philip Colman, Principal, MST Lawyers

A one line statement I often make to my clients in the context of successfully resolving disputes or succeeding in Court is “he who has the most and best documents usually wins”.  It is a statement that I stand by and I hope this short article will explain why.

In my role acting for franchisors and franchisees in disputes and litigation, I am constantly coming across situations where:

  • Allegations are made or denied, without there being any written or electronic record of the events giving rise to the allegations; or
  • Records have been lost or cannot be located.

Take the typical case where a franchisee has entered into a franchise agreement only to find that the business does not meet its expectations and then looks for ways to exit the business without significant financial loss.

A lawyer acting for the franchisee will seek instructions as to what were the drivers or inducements that caused the franchisee to enter into the franchise agreement.  Often the lawyer will be told that during the “selling” process the franchisor said things indicating that the franchisee would be successful in running the business, for example:

  • Statements as to the suitability of the location and customer foot traffic;
  • Statements as to likely turnover and profit; or
  • Statements as to the number of hours required to be worked to achieve these results.

It might be alleged that these statements were made just before the decision to proceed was made and that these statements convinced the franchisee that it ought to proceed.

The franchisee will tell his lawyer that his business is failing because none of these statements were true or came to pass and that it had therefore been misled or deceived into proceeding. This may well give the franchisee a right to seek an order terminating the franchise agreement and compensation under the Australian Consumer Law.

But can these allegations be proved?  Where do the parties sit, if there is no written or electronic record of the making of these statements? Can the franchisee prove the allegations without such records based solely on the franchisee’s oral testimony?

The answer to the last question is clearly yes, but, in the absence of any written or electronic record of the making of these statements, the risk of the franchisee losing is quite high, particularly if the franchisee has been silent as to these allegations for a number of years.  Courts in Australia have approached these cases in the manner discussed by the former Chief Justice of the NSW Supreme Court in Watson v Foxman (1995) 49 NSWLR 315 as follows:

“Where the conduct is the speaking of words in the course of a conversation, it is necessary that the words spoken be proved with a degree of precision sufficient to enable the court to be reasonably satisfied that they were, in fact, misleading in the proved circumstances. In many cases (but not all), the question whether spoken words were misleading may depend upon what, if examined at the time, may have been seen to be relatively subtle nuances flowing from the use of one word, phrase or grammatical construction rather than another, or the presence or absence of some qualifying word or phrase, or condition. Furthermore, human memory of what was said in a conversation is fallible for a variety of reasons, and ordinarily the degree of fallibility increases with the passage of time, particularly where disputes or litigation intervene, and the processes of memory are overlaid, often subconsciously, by perceptions or self-interest as well as conscious consideration of what should have been said or could have been said. All too often what is actually remembered is little more than an impression from which plausible details are then, again often subconsciously, constructed. All this is a matter of ordinary human experience.”

From the perspective of the franchisor who is denying the allegations, the risk of losing also exists because the Judge, who will hear conflicting accounts of the important conversation, will have to decide who to believe.

Both parties might believe they are giving a truthful account of the conversation (they are different because their memories are not perfect). Of course, one party might be deliberately lying.  A Judge, in such a case, has to find that one account of the conversation was wrong.  Judges embark on this difficult task by:

  • Assessing the credibility of the key witnesses (including observing their demeanour when giving evidence); and
  • Looking for other undisputed facts or documents that might make one story more probable than not.

I have been involved in cases where a Judge has accepted the evidence of a person who my client said was blatantly telling lies, over my client’s truthful evidence. That is our system of judicial fact-finding, a system that is not perfect, but with the skills of our judiciary, the best we can hope for.

When reading Court judgments, very often Judges will find in favour of the party that has either:

  • Made a contemporaneous record of the conversation; or
  • Confirmed the key matters discussed in a subsequent letter, email or text (particularly in circumstances where the other party has not subsequently disputed the things stated in that communication).

Some franchisors record key meetings with prospective franchisees and provide the prospective franchisee with a copy of the audio or video recording. This is a good practice, but it is not full proof. What about all the other ancillary discussions that are not recorded?

Take the example above. The franchisee’s case would be much stronger, if either:

  • Notes were taken during the meeting recording the things discussed or an audio or video recording was made; or
  • The franchisee sent an email to the franchisor along the following lines:

“Thanks for your time today. I was substantially comforted by your comments that the location was perfect for the business and that I should have no problem achieving an average weekly turnover of $20k per week. This ensures that the business will be viable and that I will be able to meet all my commitments and make a reasonable profit. This has convinced me to proceed and I will sign the necessary documents and pay the sum you require in the next couple of days.”

If the above email went unanswered, it would be hard for the franchisor to later deny the franchisee’s account of the conversation.

Of course, an alert franchisor might immediately respond contesting the franchisee’s account of the conversation and provide some form of disclaimer. But at least if that occurs, either the deal might not proceed or there will be clarity as to the basis upon which the parties proceed.

Alternatively, the franchisor might respond along the following lines:

“Thanks for your time today.   Although we discussed some financial scenarios, I wish to make it abundantly clear that you should not rely upon these scenarios and that you must conduct your own assessment as to whether the business will be satisfactorily viable for you. You should seek good advice from competent lawyers, accountants and business advisers and make your decision based upon their advice and your own assessment rather than anything we have said. This is something we will be asking you to warrant to us before we will proceed.”

Buying or selling a franchised business is a major transaction and parties cannot afford to be tardy with their record keeping. Then, having made the records, it is important that they are stored in an easily accessible place. I have been involved in numerous cases, where everything has been saved on the hard drive of a laptop (and not backed up anywhere else) and the laptop has either disappeared or the data irretrievably corrupted. The key email, that my client thinks will save the day, is lost.

Finally, I make the following observations that further emphasise the importance of good record keeping:

·                     Clause 19 of the Franchising Code of Conduct imposes specific obligations on franchisors to retain certain records for at least 6 years, including documents that may support or back up statements or claims made in the disclosure document;

·                     There are numerous legislative regimes dealing with the retention of documents (usually prescribing periods of up to 7 years), such as tax laws, corporations laws and employment laws; and

·                     It is a crime (punishable by imprisonment) to destroy evidence, including documents, which is, or is reasonably likely to be, required in evidence in a legal proceeding.

MST’s Dispute Resolution & Litigation Team, with extensive experience in dealing with cases where the documentary records are far from perfect (and seen the problems this causes), are well placed to advise our clients in relation to document making, keeping and retention and to train employees as to the disciplines of proper record keeping.

For more information, please contact our Dispute Resolution & Litigation Team by email  or call  Philip Colman on 03 8540 0240 if you would like to discuss this case in further detail