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Giving Projections – Franchisees Win $1.22M in Damages

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By Kaye Griffiths, Senior Associate, Dispute Resolution and Litigation, Mason Sier Turnbull

A recent decision of the Victorian Court of Appeal awarded a Franchisee $1.22M in damages against the Franchisor, Billy Baxter’s (Franchising) Pty Ltd. The Franchisor operates 21 stores in Australia, predominantly in Adelaide. It is now in provisional liquidation.

The Franchisees argued that they were misled and deceived by representations made by a representative of the Franchisor prior to entering into the Franchise Agreement for a greenfield site in an Adelaide suburb.

The Franchisees argued that they were told to anticipate a turnover for the franchised business of $1.3M or at least a turnover that would support the payment of operating costs and result in a profit being made.

The store did not reach the represented turnover and the Franchisees alleged that they were unable to pay the Franchisor the fees due to it under the Franchise Agreement. They terminated the Franchise Agreement.

The Franchisor accepted the Franchisee’s termination as a repudiation of the Franchise Agreement and sued them for damages.

The Franchisees issued a counterclaim alleging that they had been induced to enter into the Franchise Agreement based on the misleading and deceptive conduct of the representative of the Franchisor.

The Franchisor was initially successful. However, the Franchisees appealed to the Victorian Supreme Court of Appeal where the Court held that there were no reasonable grounds for the Franchisor to make the representations regarding the potential turnover of the store and awarded them damages.

This type of case is not uncommon. Whilst the giving of projections is often seen as being necessary to secure a sale, the Competition and Consumer Act says that if the giver of projections cannot prove the existence of reasonable grounds for those projections, they will be deemed to be misleading and deceptive.

Therefore, if you intend giving projections to a prospective buyer of a business or franchisee, make sure you do your homework, retain your working papers and the data upon which you relied, make sure that such data is relevant and insert strong disclaimers on anything you provide.

MST is well placed, with experienced lawyers in the Franchising, Corporate and Litigation teams, to guide you through the process of selling a business or a franchise in circumstances where you may consider the giving of projections as being necessary to clinch the deal.