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Lessons for Franchisors in preventing Misleading and Deceptive Conduct

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In an earlier article, we summarised the decision of Lanhai Pty Ltd and Ors v 7-Eleven Stores Pty Ltd [2022] VSC 132, in which Justice Riordan in the Supreme Court of Victoria found that 7-Eleven engaged in misleading and deceptive conduct under section 18 of the Australian Consumer Law.

On 8 March 2023 the Court of Appeal in Victoria affirmed Justice Riordan’s finding that 7-Eleven’s explanation of the Franchise Agreement duration to the prospective Franchisee was misleading.

Trial outcome and Appeal

The term of the 7-Eleven Franchise Agreement is the earlier of the expiry of the Lease, the expiry of any further term Lease if the option is exercised by 7-Eleven, or 10 years from when the Franchise business began operating (‘the reduced term explanation’).

At trial, Justice Riordan disagreed that 7-Eleven’s franchise development manager (‘FDM’) provided the reduced term explanation to the Franchisee at their initial meeting. It was found that a document provided to the Franchisee in August was misleading because it listed the Franchisee’s Heathmont store as having a 10-year term whilst the Term of other stores were ‘as per Lease’ (‘the August document’).

The Franchisee was awarded damages of $595,246.40. This amount represented the loss of opportunity that it suffered, as the Franchisee have pursued other business ventures but for the misleading conduct.

On appeal, 7-Eleven submitted that the trial judge erred in not considering evidence from the entire initial meeting between the parties, and should not have rejected FDM’s evidence that the reduced term explanation was provided during that meeting.

Outcome of Appeal

Justices McLeish, Osborne and Hargrave agreed with 7-Eleven that the FDM gave the reduced term explanation at the initial meeting because the Franchise Agreement Term is critical to the agreement and the FDM’s meeting notes were consistent with giving the explanation.

On appeal, 7-Eleven accepted that the August document could be misleading if no further clarifications were provided, and that if the Franchise Agreement Term was contingent on a Lease option being exercised then the Term would be listed as being ‘as per Lease’.

The Court further considered the August document to be misleading as it provided information about specific franchise stores available for purchase and the Term of the Heathmont store which the Franchisee purchased was mistakenly recorded as 10 years. It held that the FDM did not correct this mistake by tailoring his advice about the actual Term of the Heathmont store.

To dispel the misleading nature of the August document, the FDM’s communication of the reduced term explanation needed to be sufficiently understood by the Franchisee.

The Court held that the Franchisee did not understand the Franchise Agreement Term arrangements, even though it accepted that the FDM provided the reduced term explanation. In support of this finding, the Court highlighted the Franchisee’s 18 June 2014 email to 7-Eleven in which the Franchisee incorrectly stated that the Mount Waverley franchise contained a 7-year term. In actuality the store had a 2-year term with a further 5-year term option, and the FDM did not clarify this aspect or correct the Franchisee.

Lessons to be learned

Not all current or prospective franchisees understand the franchise documents and seek legal and financial advice. Franchisors should review their processes to minimise any risk of conduct that could be interpreted as misleading or deceiving to Franchisees or prospective Franchisees.

Franchisors should consider:

  • ensuring that all franchise documents provided to franchisees, in particular the Franchise Agreement, Disclosure Document, Key Facts Sheet and Profile on the Franchise Disclosure Register contain consistent terms and explanations;
  • that any disclaimers should be featured prominently in the document, using the same size font as the rest of the text. Disclaimers that are in small or fine print or worded in a confusing manner may add weight to arguments of misleading or deceptive conduct and/or a contract containing unfair contract terms contrary to the Australian Consumer Law (‘ACL’);
  • reviewing and updating recruitment and field staff training processes to ensure that they explain key franchising concepts to Franchisees, including the interaction between the Franchise Agreement Term, the Lease and any further term options under the Lease; and
  • providing tailored advice to prospective Franchisees about the franchise that they wish to purchase, rather than providing general information that may not be relevant to that store.

Franchisors who would like guidance on minimising the risks of misleading and deceptive conduct, or require their documentation and internal processes to be reviewed to ensure compliance with the ACL should contact MST’s Franchising Team on +61 3 8540 0200 or as follows:

Raynia Theodore on (03) 8540 0242 or raynia.theodore@mst.com.au

Esther Gutnick on (03) 8540 0267 or esther.gutnick@mst.com.au