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Franchise First
28 Apr 2009
Court of Appeal decides both franchisors and franchisees are consenting adults
The Court of Appeal recently released its decision in David & Anor v TFAC Ltd, which dealt with the fallout from a franchise relationship turned sour. The decision demonstrates that when it comes to franchise agreements, both parties should be considered 'consenting adults' in the eyes of the law, if full disclosure and independent advice has been received ahead of an agreement being signed.
The Relationship Begins…and Ends
James' Home Services (JHS) is an Australian franchise operation, providing home cleaning and maintenance services. Back in March 2005, the company expanded into New Zealand by granting a nationwide master franchise to a 'Mrs David'. Three months later Mrs David met with potential franchisees 'Mr and Mrs Grisdale' and began courting the couple, with a view to them becoming her regional franchisee for Auckland's eastern suburbs.
However, this wasn't any big romance, in fact it was more like an arranged marriage, with the Grisdales being given a formal disclosure document to sign (as is best practice in franchising). This gave detailed information on the nature of the 'proven' JHS franchise opportunity, including the fees payable, the training that would be provided by JHS, and details of 'previous relationships'. Those included the relationship with the former franchisee for the Grisdale's territory, whose franchisee agreement had been cancelled by Mrs David in September 2005 - a month after she met the Grisdales.
Like any good franchisor (but perhaps unlike many suitors), Mrs David highlighted the importance of obtaining independent advice before entering into the franchise agreement. The Grisdales saw the sense in this and signed a certificate which provided details of the lawyer and accountant who had given them this advice and also included a common exemption saying they had entered into the agreement on the basis of their own judgement. By December 2005, the franchise agreement was signed and commencement for trading began in earnest.
Unfortunately, things quickly turned sour. Two months later, the Grisdales realised they had made a serious mistake in becoming a JHS franchisee and wrote a letter of complaint raising concerns about their training and the overall transferability of the JHS system from Australia to New Zealand. Matters quickly escalated to the point where both parties cancelled the franchise agreement between them.
That's when the relationship really turned toxic. Before you knew it, both parties were in the High Court, with the Grisdales alleging various breaches of the Fair Trading Act - including the alleged misrepresentation that JHS was a proven system in New Zealand. The High Court sided with the couple and ruled that Mrs David had misrepresented the current reality of the market for the JHS system in New Zealand. In reality, the New Zealand market was an 'unrelieved failure'. The independent advice received by the Grisdales and the contractual exemptions from liability were of little consequence.
An Appeal to Reason
Not surprisingly, Mrs David appealed the decision to the Court of Appeal who, in contrast to the High Court, had little sympathy for the Grisdales. They focused on the fact that the couple knew that JHS was a greenfields operation in New Zealand and that there was an inherent degree of risk with a start-up venture of this nature. Even with the cancellation of the former franchisee for the Grisdale's territory, there was no way Mrs David knew or should have known that the New Zealand operation was an 'unrelieved failure'.
The Court of Appeal also considered the High Court was wrong to disregard the independent advice received by the Grisdales and the related exemption provisions. Far from being buried by Mrs David (as is commonly the case), these were at the forefront of the contractual process/courtship. As the Grisdales understood that JHS was new to New Zealand, the fact independent advice had been required by Mrs David and then received by the Grisdales was important. It was unreasonable for the Grisdales to simply rely on assurances that they thought they had been given rather than on the independent advice actually received from persons experienced in franchising.
The Consenting Adults
The Court of Appeal decision really is a victory for common sense. It is difficult to see what more Mrs David could have done to get the Grisdales into a position where they could make an informed decision about the relationship they were about to enter into. In the current economic climate, this decision sends a reassuring message to franchisors that if they are upfront and honest in disclosure and make a point of insisting that franchisees receive independent legal advice, a franchisee should not be able to hold them accountable when times get tough. Being upfront and honest will also ensure franchisors are not guilty of misleading or deceptive conduct in breach of the Fair Trading Act.
The decision also shows that courts will generally respect the sanctity of a contract entered into by 'consenting adults'. In this sense, if full disclosure and independent advice has been received, the relationship between a franchisor and franchisee should not be treated as a 'special case' but simply as a commercial relationship between informed parties negotiating from positions of equality.
Authors
Earl Gray
Partner - Intellectual Property
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Richard Watts
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Alex Campbell
Senior Associate - Corporate & Commercial
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Lisa Carbines
Senior Associate - Corporate & Commercial
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Sarah Chapman
Senior Associate - Intellectual Property
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Sonya Hill
Senior Associate - Corporate & Commercial
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Andrew Tetzlaff
Senior Associate - Corporate & Commercial
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In This Article:
The Court of Appeal decision demonstrates that when it comes to franchise agreements, both parties should be considered 'consenting adults' in the eyes of the law, if full disclosure and independent advice has been received ahead of an agreement being signed.
