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Coffee a “no go”: Coffee franchise falls foul of misleading and deceptive conduct laws

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By Marianne Marchesi, Associate, MST Lawyers

The recent case of Brotherson v Hursle Pty Ltd [2013] QDC 257 is yet another reminder to franchisors that care must be taken when making representations to potential franchisees about the success or profitability of a franchise.

In this case, Mr and Mrs Brotherson enquired about and subsequently entered into a Franchise Agreement for an ‘Espresso to Go’ coffee van franchise for the Lismore area.

A major drawcard for the Brothersons was a guarantee offered by the franchisor that the franchisee would be able to turnover 100 cups of coffee in a day. This guarantee appears on the franchisor’s website, disclosure document and by way of a special condition in the Brothersons’ Franchise Agreement.

In addition to these written representations, a number of verbal representations were made by the franchisor to the Brothersons. They were told that most franchises averaged 160 cups of coffee per day, whilst other more successful franchises sold over 200 cups of coffee per day.

The Brothersons then made enquiries with another Espresso to Go franchisee, who averaged 107 cups of coffee per day. The franchisor told the Brothersons that this particular franchisee was “old and slow” and yet was still able to maintain this average.

Once the region of Lismore had been identified, the franchisor represented that “feasibility studies” into the area would be conducted. The franchisor subsequently advised the franchisee that the area ‘was so good he could put three vans into there’. As it turned out, no formal feasibility study had been conducted.

The Brothersons argued that in deciding to enter into the Franchise Agreement, they had relied on:

a)    the fact that the franchisor said a feasibility study had been conducted which indicated that Lismore was a favourable territory for a franchise;

b)    the 100 cups of coffee per day guarantee;

c)    that the business would be established for them by the franchisor, so that it was a “turn-key” operation;

d)    that the Espresso to Go system had never had a failure; and

e)    that they would eventually be able to sell 150 cups of coffee per day or more.

The franchisor argued that its 100 cups of coffee guarantee was disclaimed by the following statement which appeared in its disclosure document:

“While the franchisor guarantees a turnover of 100 cups in a day during the training and handover period, no long-term turnover guarantee applies and individual results may vary.  Some businesses may turnover more or less than 100 cups in a day following handover and results will depend on the individual’s ability to master the skills required to operate the business.”

The judge ultimately found that the franchisor had made misleading representations which were relied upon by the Brothersons, and that these could not be contracted out of.  The Brothersons were awarded compensation for the loss they suffered, amounting to $202,732.58.

Franchisors should be very careful when making representations about a franchise – whether as to earnings projections or potential success. In relation to representations about future matters, the onus is on the franchisor to demonstrate that it had reasonable grounds for making the representation. Therefore, franchisors should ensure that representations are based on facts and, if relevant, that actual data (rather than forecasts) is provided. Otherwise, the franchisor may expose itself to claims of misleading and deceptive conduct.

For Franchising advice, contact our experienced Franchising Team on +61 3 8540 0200 or email the author of this article, Marianne Marchesi.