Franchisee’s Allegations Not Proved: Jump Swim School’s Franchisor Did Not Mislead

By Nicholas Mason, Law Clerk and Alicia Hill, Principal, MST Lawyers

The recent decision of H2O Learning Pty Ltd v Swim Loops Pty Ltd t/as Jump Swim Schools [2019] NSWDC 165 has considered the application of misleading and deceptive conduct claims where verbal representations have been made alongside written franchise agreements.

Background

In late 2015, Mr Shaun Trumbull (Mr Trumbull) developed an interest in becoming a franchisee for the operation of swim schools in Northern Sydney. He identified the franchise model of Jump Swim Schools (Jump) as a potential suitor.

Mr Trumbull then sought information from employees of Jump, namely Mr James Rice (Mr Rice), the head of commercial operations, and Mr James Hurry (Mr Hurry), the commercial leasing manager.  It was alleged verbal representations were made to the effect that H2O, a company established by Mr Trumbull to operate the franchise business, would have two swim schools operating by November 2016. This was to coincide with the peak summer business period.

Mr Trumbull further alleged that the same representation was conveyed in a ‘Franchise Build Handbook’. This representation concerned a ‘Table of Build Time’ expressing an indicative timeline of the milestones before the commencement of trade. The document was provided by the director of Jump, Mr Ian Campbell.

Based on this representation, Mr Trumbull entered into two franchise deeds in March 2016. Delays in locating suitable premises prevented the realisation of the estimate that the swim schools would be operational by the summer. Throughout 2016, H2O had outlaid substantial expenditure and sought to terminate one franchise deed. The other agreement was terminated by mutual consent.

Claim Made Under the Australian Consumer Law

H2O argued that the representations constituted misleading or deceptive conduct in contravention of section 18 of the Australian Consumer Law. It alleged that the representations were made concerning a future matter that Jump had no reasonable basis for making.

For the purposes of the misleading and deceptive conduct analysis, Abadee DCJ distilled the two verbal claims made by the Jump employees, and the Franchise Build Handbook into one representation:

“H2O would have 2 operational Jump Swim Schools operating in the Northern Beaches of Sydney by November 2016”.

Satisfying the Evidentiary Burden

H2O submitted that under section 4 of the Australian Consumer Law, the representation was to a future matter and would accordingly be taken to be misleading and deceptive unless Jump could adduce evidence to the contrary.

Mr Rice recalled that he had mentioned to Mr Trumbull that six to nine months would be a reasonable timeframe to expect the site to be operating. However, this statement was qualified on the basis that operations could only expect to commence on time if no issues arose. Mr Hurry, in his evidence, deposed that at no stage was promissory language used. It was argued that the absence of phrasing such as “absolutely” negated a guarantee that the two swim schools would be operational within six to nine months.

Mr Campbell gave evidence that considered the reasonableness of the representation. It was claimed that the ‘Franchise Build Handbook’ conveyed only an indicative summary based off the establishment of a prior franchise, and it contained significant qualifications, including only approximate dates and notice that they were dependent on cooperation by third parties.  

Considering the Claims

Abadee DCJ was not persuaded that an enforceable promise was made for the two swim schools to be operational in Northern Sydney by November 2016.

His Honour opened his analysis by considering that in the objective circumstances, no terms within the imputed representation indicated when the clock would begin to run for the satisfaction of the overall timeframe. By extension, it would be reasonably expected that if operation by the summer period were indeed a promissory statement, it would have been fixed by written reference within the franchise deed. The absence of such a term within the agreement was decisive.

Abadee DCJ then considered the position of Mr Trumbull. He reasoned that because Mr Trumbull was a capable and intelligent man capable of protecting and advancing his interests, he would not have been content with a mere verbal promise guaranteeing the commencement of operations in time for summer.  However, nothing could be produced despite numerous email exchanges that contained the alleged representation.

Finally, it was seen to be obvious that the timeframes listed in the handbook were dependant on a number of factors beyond Jump’s control. The inclusion of language such as “averages”, “dependant on” and “varies” rendered the document as merely a guide and not an assurance.

Comments on Causation and Loss  

While finding that H2O had failed to establish the pleaded representation, Abadee DCJ passed comment on some of the other issues raised during the trial. His Honour indicated that he was not persuaded that the representation, had it been made out, caused H2O loss.

It was not accepted that H2O being induced to enter into franchise deeds on the faith of a represented timeframe estimate, was sufficient alone to establish the causation requirement. The alleged misrepresentation was held to not be a decisive consideration in entering the franchise agreements, and it, therefore, lacked a causal connection between the alleged misrepresentation and loss.  

Lessons to Learn

The decision serves as a reminder to franchisees to ensure any verbal representations they wish to enforce be reduced to written form. This is especially applicable to franchisees with commercial experience. Furthermore, when considering pursuing a misleading or deceptive conduct claim, franchisees should ensure the alleged misrepresentation is decisive in their loss, or otherwise risk their claim failing despite a finding that a franchisor’s statement was misleading or deceptive.

For more information about your franchise or content prepared in this article, please contact our Franchise Law team by email, or call +61 3 8540 0200.