02 September 2005
Key Points:
Liability under the sections 52 or 53 of the Trade Practices Act for pre-contractual misrepresentations requires reliance upon the misrepresentation by the victim so as to enter the contract. It is possible that what would otherwise be misleading or deceptive, and any reliance upon it, may be contradicted by suitably clear disclaimers in pre-contractual documentation, and clear non-reliance and exclusion of liability clauses. Even if the Full Court is wrong, such measures are a wise precaution.
Liability under the sections 52 or 53 of the Trade Practices Act for pre-contractual misrepresentations requires reliance upon the misrepresentation by the victim so as to enter the contract.
It is possible that what would otherwise be misleading or deceptive, and any reliance upon it, may be contradicted by suitably clear disclaimers in pre-contractual documentation, and clear non-reliance and exclusion of liability clauses. Even if the Full Court is wrong, such measures are a wise precaution.
Background
The dispute arose out of the acquisition and operation by Silver Fox of a Lenard's Poultry Shop franchise under a written Franchise Agreement. Mr and Mrs Baker had guaranteed the obligations of Silver Fox under the Franchise Agreement. Silver Fox and Mr and Mrs Baker alleged that the respondents had engaged in misleading and deceptive conduct in the period leading up to the signing by Silver Fox of the Franchise Agreement and by entering into and subsequently terminating the Franchise Agreement.
This was a franchise arrangement under which the franchisor chose and rented a location, and then undertook to supply products to the franchisee, in this case poultry, for sale by the franchisee operating in accordance with a procedures manual provided by the franchisor.
The franchise business was a failure, and these proceedings arose out of claims by the franchisee and Mr and Mrs Baker, that they had been misled by misrepresentations made before they entered in to the Franchise Agreement, in breach of section 52 of the Trade Practices Act 1974 (Cth). In turn, the franchisor made a claim for money payable under the Franchise Agreement.
The trial judge concluded that two material representations were made to the applicants by the documentary material given to them by Poulet Frais before they signed the Franchise Agreement; he referred to these as ‘the sales/profitability representation' and ‘the site quality representation'. Briefly put, the former was a representation that it would be possible to achieve a certain turnover and annual profit from a Lenard's Poultry Shop franchise, and the second was that the location chosen by the franchisor was chosen carefully and could generate the required turnover. The trial judge found these representations misleading because the shop chosen by the franchisor could not reasonably support the turnover and profit projection in the sales/profitability representation, because it had been chosen in an area the population of which was unlikely for some time to be interested in prepared poultry of the type offered by the franchise, by virtue of its lower socio-economic profile, although this might become true at some time in the future.
As it happened, the Full Court disagreed that these representations in the documents provided to the applicants, which appear to have been made, could have been misleading at all, which really disposed of the matter. The Court noted that the documents were full of words qualifying and hedging about what appeared to be assurances exactly as the trial judge found. The franchisees were mature and competent individuals, and had legal and accounting advice.
In addition, in the Franchise Agreement there were "non-reliance" and "entire agreement" provisions. The Full Court found that these had been brought to the franchisees' attention.
Strictly speaking, the Full Court did not need to consider reliance having found that Poulet Frais did not engage in misleading or deceptive conduct. Notwithstanding that, the Full Court felt that the trial judge's findings on reliance could not be sustained because they were inconsistent with the applicants' numerous written acknowledgments to the contrary.
Although there are numerous authorities for the proposition that clauses seeking to exclude liability for contraventions of section 52 are not effective, the existence of an exclusion or qualification clause is relevant to a determination of the question of whether an applicant has established reliance. In the Full Court's view, this was a clearer case of non-reliance than Keen Mar Corporation Pty Ltd v Labrador Park Shopping Centre Pty Ltd (1989) ATPR (Digest) 46-048 where Justices Morling and Wilcox reversed a finding of reliance made by the primary judge holding that a well-drafted disclaimer, drawn to the attention of the contracting party and acknowledged in writing to have been made, was sufficient to negate reliance. Here the disclosure documents contained numerous exhortations to the applicants to make their own investigations of the potential profitability of the franchise. There were also acknowledgments in the disclosure documents and the Franchise Agreement in the clearest terms that the applicants did not rely on any representation as to the turnover or profits of the franchise.
In this case, the applicants did not seek the advice of their solicitor or accountant as to the accuracy, reliability or reasonableness of the information provided in the disclosure documents. Without deciding the question, the Full Court observed that their failure to do so may well have amounted to conduct which destroyed any possible causal connection between a contravention of section 52 and loss or damage (see Henville v Walker (2001) 206 CLR 459; see also I & L Securities Pty Limited v HTW Valuers (Brisbane) Pty Limited (2002) 210 CLR 109 in which Justice McHugh referred with approval to the decision of Justice French in Pavich v Bobra Nominees Pty Ltd (1988) ATPR (Digest) 46-039).
Notwithstanding the authorities cited, this is a courageous decision of the Full Court, made even more so because this is a franchise case. The known weakness of potential franchisees to be less than discerning with respect to the information provided to them, by a potential franchisor of immensely greater experience in the relevant business, even if advised by a solicitor and accountant, has led to provisions of the Trade Practices Act particularly directed to this situation (Part IVA and the Franchising Code of Conduct). These did not apply to this case, the Franchise Agreement having been entered before the commencement of the application of the Code, but it might have been thought that they may have encouraged caution to the decision of the Full Court. In RACV Insurance Pty Ltd & Anor v Unisys Australia Ltd & Ors (2001) VSC 300, affirmed in the Court of Appeal [2004] VSCA 81, the Court found that RACV had been misled in fact, notwithstanding its commercial stature, the advice it received, the warnings in the documentation given to it and the exclusion clauses in the contract it signed, and little counted after that. In Poulet Frais, the fact that the Mr and Mrs Baker were or were not deceived in fact was found to be of little significance.
