2. Case Update 2016
Ben Coogan
Partner, Thomson Geer Lawyers

3. Guirguis Pty Ltd & Ors v Michel’s Patisserie System Pty Ltd & Ors [2016] QDC 117 [27 May 2016]
Facts
9 day hearing before Judge Koppenol (District Court of Queensland)
Former franchisee brought a claim against Michel’s Patisserie (RFG) for misleading or deceptive conduct / negligent mis-statement / breach of contract – $634,429.85
Counterclaim brought by RFG for $650,000
Franchisee abandoned premises 18/7/13
Franchise agreement was to continue until 2022
22/7/13 – franchisee purported to terminate the agreement but owed $31,000 to RFG
25/7/13 – RFG terminated the agreement based upon plaintiff’s abandonment of the franchising business

4. The Guirguis case (cont.)
No transaction case
The franchisee would not have entered into the franchise business but for RFG’s misleading or deceptive conduct
Court identified that the misleading or deceptive conduct was alleged to be:
the making of false representations (that regular deliveries from Brisbane to Townsville in freezer trucks of snap-frozen product would maintain its quality once thawed)
failure to disclose certain important matters (including the defendant’s silence about uncertain future supplies from Dyson’s Bakery in Brisbane)

5. The Guirguis case (cont.)
The court found reliance was not made out because:
neither Mr nor Mrs Guirguis identified in deed of prior representations / questionnaire, any of the alleged representations upon which they relied upon in this case
Mr Guirguis did not avail himself of the opportunity to complete fresh questionnaires when asked by RFG to do so
Mr Guirguis ‘knew full well what was being asked of him in the questionnaire but disingenuously attempted at the trial to convey a contrary impression’

6. The Guirguis case (cont.)
Abandonment and termination
Franchisee abandoned the franchised premises 9 years before it was to expire
Franchisee’s purported termination when in breach of its provisions meant that the purported termination was invalid
RFG’s termination was valid

7. The Guirguis case (cont.)
Failure to disclose
Franchisee alleged that the defendants knew prior to franchisee’s entry into the agreement but the defendants did not disclose certain information:
as at 30 March 2012, there were no companies able to manufacture and supply the product
as at 23 March 2012, bakeries across Australia had not been able to meet their contractual requirements and produce products from Michel’s Patisserie stores
as at 16 February 2012, Dyson’s Bakery were in financial difficulty
as at 2 April 2012, Dyson’s had been placed into administration

8. The Guirguis case (cont.)
Koppenol J held:
there was no evidence at the time the agreements were signed that Dyson’s Bakery were unable to supply product
the franchisees did not enter into agreements on reliance upon and induced upon representations about the location of the bakery
by the time franchise business commenced the disruption by Dyson’s Bakery had been remedied as products were coming out of Sydney
an obligation to make post transaction disclosure would change nature of the no transaction case pleaded by franchisees

9. The Guirguis case (cont.)
Negligent mis-statement and breach of contract
Franchisees claims for negligence mis-statement and breach of contract were unmaintainable because they were expressly excluded by clauses contained in the franchise agreement
Franchisee ‘release and forever hold harmless’ the defendants ‘from all actions, suits, proceedings… arising out of or in connection with… any failure by a manufacturer, producer or supplier approved by the franchisor to meet the standard specified in clause 5.7(a)(ii)’. Further clause provided an acknowledgment and agreement that the franchisor was not to be liable for loss or damage suffered by the franchisee for supply or non supply of products

10. The Guirguis case (cont.)
RFG’s counterclaim
Franchisee attempted to argue that RFG deciding to operate the store post abandonment was an intervening event precluding any claim in respect of the balance of the lease term
Court rejected that on the basis that it had not been pleaded and no case authority to support it
Franchisee also submitted RFG’s quantum calculation was defective because the accountant who prepared the calculation only prepared mere forecast estimates

11. The Guirguis case (cont.)
Court held:
While RFG’s accountant used the word ‘estimate’ it was clear that he followed clause 11.4 of the franchise agreement and what it required

12. The Guirguis case (cont.)
Key points taken from this case
The court in this case was clear in finding that franchise agreement entered into was enforceable and the plaintiff could not extract itself from it and its effects.
Therefore, the Court made it clear that to be successful in a representation claim, a franchisee needs to have relied on the specific representations made at the time of entrance into the agreement.
Just 8 pages in length for a 9 day hearing
Franchisee has appealed – citing 13 grounds – criticism of lack of reasoning in the judgment and lack of clearly identifying pleaded representations. Appeal was heard on 27 and 28 September 2016.

13. Civic Video Pty Ltd v Paterson [2016] WASCA 69 Court of Appeal (WA) 27 April 2016
Key facts
Civic Video (franchisor) and the Thompsons (franchisee) entered into agreements to operate two Civic Video stores
Franchisor consent was required for franchisee to sell, assign or transfer
Franchisee had to pay monthly franchise fee
Franchisee fell behind in their payment of franchise fee
Franchisee listed stores for sale
Franchisee entered into an agreement with a prospective purchaser but did not obtain franchisor consent. That sale did not proceed

14. The Civic Video case (cont.)
A Mr Paterson took over the head lease of the complex that the franchisee was trading at
Mr Paterson made written offers to the franchisee to purchase the assets of each of the two stores
Mr Paterson gave evidence that it was his intention in acquiring both businesses to consolidate them into one Video Ezy business

15. The Civic Video case (cont.)
Primary judge’s decision
Conduct of franchisee constituted a repudiation
In assessing damages, primary judge found at time of repudiation franchisee could not continue trading due to their financial position
Franchisor would not have received any further franchise fee, therefore no loss suffered by franchisor – only claim damages for loss of opportunity
In relation to the tort of intentional interference the Court concluded that Mr Paterson did not know whether the sale of businesses to him would be a breach by franchisee of the franchise agreements with Civic Video

16. The Civic Video case (cont.)
Issue before Court of Appeal
Franchisor appealed primary judge’s decision on essentially two grounds:
damages should have been assessed on loss of bargain rather than loss of opportunity
primary judge erred in finding that Mr Paterson did not induce franchisee to breach their franchise agreements with franchisor

17. The Civic Video case (cont.)
Court of Appeal decision
Paterson did not induce franchisee to breach franchise agreement
Knowledge of franchise agreement?
Indemnity and sale agreement to protect Paterson
Paterson was prepared to pay $500,000 for two stores

18. The Civic Video case (cont.)
Damages
Franchisor entitled to ‘loss of bargain’ damages (hypothetical performance damages)
Franchisor’s right to terminate if franchisor voluntarily abandoned the business should not be read as giving a franchisee carte blanche to walk out of the business at any time during the term without liability
Advertising fees – had to be paid monthly
Franchisor must credit all fees paid by franchisees to the ‘advertising fund’ and separately account for them

19. The Civic Video case (cont.)
The payment by franchisee were fees for the system as a whole and not generally in relation to the franchisee’s stores
Franchisor entitled to enforce obligation to pay all advertising fees for purposes of advertising fund and to seek damages for diminution of funds available to franchisor to develop and implement advertising, development and marketing program for the Civic Video System by reason of the franchisee’s failure to perform the franchise agreement

20. The Civic Video case (cont.)
Key points from this case
Consequences of repudiation can be severe
Franchisee had not obtained consent to assign agreement
Very difficult to PROVE the tort of interference with contractual relations
Assessment of damages, in my view, seems to be a harsh one for the franchisee

21. Questions?
Ben Coogan
Partner
Thomson Geer