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Guirguis v Michel’s Patisserie

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By Emily Stubbs, Lawyer at MST Lawyers and Alicia Hill, Principal, MST Lawyers

This article provides an update on a previously reported franchising court case decided in 2016 and the lessons to be learned.

On 9 May 2017, the Queensland Supreme Court of Appeal handed down its decision allowing the former franchisee of a Michel’s Patisserie franchise a re-trial and set aside the District Court of Queensland’s prior judgment

District Court of Queensland Decision

In the principal case heard in the District Court of Queensland, the former franchisee of a Michel’s Patisserie franchise in Townsville brought a claim against the franchisor for misleading and deceptive conduct.  The franchisor counterclaimed for breach of the franchise agreement (and related occupancy licence) and sought payment of royalties, occupancy costs, lease surrender costs and fees for removal of plant and equipment.

The franchisee had abandoned the franchise business on 18 July 2013 and sought to terminate the franchise agreement on 22 July 2013, although the term of the franchise agreement was not due to expire until 2022. On 25 July 2013, the franchisor issued its own termination notice on the grounds of the franchisee’s abandonment.

Before entering into the franchise agreement, the franchisee had signed a Deed of Prior Representations and Questionnaire.  This document invited the franchisee to detail any verbal or written statements, representations or warranties provided by the franchisor; influencing its decision to enter into the agreement.

The Deed of Prior Representations and Questionnaire listed some representations regarding lease terms, skills and ongoing support.  The franchisee did not provide any additional influencing factors, despite the franchisor sending a letter (after the franchise agreement was signed), querying whether there were any other representations on which the franchisee had relied.

The document was central to the District Court’s finding that the franchisee had not relied on the representations (if they had indeed been made).  Accordingly, the franchisee’s claims failed.

The District Court found in favour of the franchisor on the counterclaim. The franchisee did abandon the franchised business, and its purported termination of the franchise agreement was unlawful because it did not comply with the terms of the franchise agreement. The franchisor was awarded $650,552.24 in damages against the franchisee and its guarantors.

Court of Appeal Decision

The franchisee appealed the District Court judgment on the basis that the Primary Judge made an error in applying the law when making his decision.

In the Court of Appeal case, the Court found that the Primary Judge in the District Court erred in his unconventional methodologically adopted in applying the relevant legal tests to the facts and failed to consider all the evidence before the Court.  More specifically, the Primary Judge did not consider whether the alleged representations were made or whether they were misleading or deceptive.  Rather the Primary Judge focused on whether the franchisee had relied on the alleged representations when entering into the franchise agreement.

Finally, the Court of Appeal ordered that the proceeding be re-heard with the franchisor paying the franchisee’s costs of the appeal.

Key learning points

The outcome of the re-trial will be important to both franchisees and franchisors as the District Court judgment had highlighted that thorough risk management practices by a franchisor, prior to entry into a franchise agreement, could assist in defending future claims made by a franchisee.  The appeal may change this current legal position.

Until the outcome of the re-trial is determined, key points to consider from this Court of Appeal case are:

  • Franchisors should ensure that any promises and statements made to franchisees are accurate;
  • Franchisors should be wary that including warranties, disclaimers and “entire agreement” clauses in franchise documentation may not displace potential reliance on any representations that may have been made;
  • Franchisees should seek independent legal advice and undertake extensive research before entering into the franchise agreement, and Franchisors should actively encourage franchisees to do so;
  • Franchisors should ensure that documents for franchisees to provide the opportunity to record any representations which it believes have been made and which influenced its decision to enter into the franchise agreement, such as prior representations statements, are comprehensive and open-ended;
  • Franchisees and franchisors should keep a written record of all representations, promises and declarations made in case a dispute arises to avoid issues regarding what happened and credibility; and
  • Individuals authorised to make representations or negotiate on behalf of a Franchisor could be open to being personally liable.

Stay tuned for the next case update on Guirguis and Michel’s Patisserie.

For more information, please email our Franchise or Dispute Resolution and Litigation team.  Alternatively, you can call Emily Stubbs or Alicia Hill on 03 8540 0200 to discuss this case in more detail.