Watt v Shepherd (No 2) [2021] FCA 826

When entering into a franchise agreement, it is crucial that parties ensure that any representations made can be made good in accordance with the agreement. The matter of Watt v Shepherd (No 2) [2021] FCA 826 demonstrates the effect of making misleading and deceptive representations to induce individuals to enter into a franchise agreement.

 

Background

The First Applicant, Mr Watt operated a pharmacy business comprising of nine retail pharmacies (Watt Group). He also provided the guiding mind and will for the head office for the Watt Group through the Second Applicant who was the trustee of the Snowy Mountains Service Unit Trust (SMSUT). The Second Applicant also provided subleases of premises used in the operations of five pharmacies.

On about April 2016, the First and Second Respondents contacted Mr Watt and proposed that interests associated with them would purchase the Watt group head office operations and be operated by the Fourth Respondent (SPG).

The First and Second Respondents made representations to Mr Watt to induce him to in and proceed with the franchising business and to influence all of the 15 pharmacies to which SMSUT provided head office and other services to become franchisees of SPG including but not limited to:

  1. The First and Second Respondent possessed a wealth of corporate experience and know-how that they would bring to operate the franchising structure;
  2. The First Respondent would pay $2 million for the transfer of the Watt Group head office operation on the basis that the franchise group would be set up comprising the individual pharmacies as core franchisees and the Third Respondent would provide $2.08 million in cash to the franchisor as operating capital for the franchising structure;
  3. The First Respondent had access to $200 million in investment funds to dive the growth of the enterprise;
  4. SMSUT would retain shares to the value of $2 million in the franchisor in consideration of its transfer of the head office operations;
  5. Within six months the franchisor would have obtained franchise agreements for 100 pharmacies, and within three years, 550 pharmacies;
  6. That the Third Respondent had indicative commitments in place for equity capital raisings totalling $65 million to fund the acquisition of additional pharmacy groups to grow and add to the number of franchisees in the franchising structure; and
  7. The First, Second, or Third Respondent had a financial backer, Catalyst Wealth who was to sign a convertible note.

On or about 14 December 2016, Mr Watt and the other proprietors of the individual pharmacies within the Watt Group agreed to participate in the franchising structure executed the franchise agreements to give it effect (the Franchise Agreements).

The Franchise Agreements contained a schedule that provided for the franchise fees that were to be payable by the franchisees. The Respondents knew at relevant times that those fees were not affordable or financially sustainable for the individual pharmacies and that their participation in the franchising structure would not result in financial benefit to those pharmacies unless there was a substantial reduction in those fees.

From about June 2017, Mr Watt made requests to the respondents to reduce the fees payable by the franchisees, to make good the representations that this would occur by that time and that the individual pharmacies would achieve the promised benefits.

Mr Watt, on behalf of all of the Applicants, requested that the respondents cooperate in dismantling the franchising structure to reinstate the status quo as it had existed prior to them entering into it.

The Respondents did not:

  1. Dismantle the franchising structure;
  2. Agree to make any reduction in fees payable under the franchise agreements;
  3. Provide the promised working capital of $2.08 million;
  4. Raise any of the amounts of money that the First and Second Respondents represented could or would be raised;
  5. Obtain any growth in the number of franchisees; and
  6. Deliver any profit or net financial benefit to any of the applicants as franchisees or otherwise within the franchising structure.

The Applicants based their claims upon the Respondent’s contraventions of ss 18 and 21 of the Australian Consumer Law (ACL), s 51ACB of the Competition and Consumer Act 2010 (CCA) and the Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (the Code).

 

Decision

Rares J found that the Representations were:

  1. Misleading and deceptive in accordance with ss 18 and 21 ACL; and
  2. Constituted unfair tactics and unconscionable conduct in accordance with ss 22(1)(g) and 22(2)(g) ACL.

He held that SPG had not complied with the Code because it had not:

  1. Created or provided a disclosure document (until 18 July 2017) (cl 8);
  2. Given a copy of any disclosure document or the Code to any of the Applicants before they executed the franchise agreement and it did not provide any information to them as required by cl 9 of the Code; and
  3. Received from any of the Applicants a signed statement as required by cl 10 of the Code.

Accordingly, the Fourth Respondent was in breach of s 51ACB of the CCA.

 

Orders

The Franchise Agreements were declared void and the Third Respondent was ordered to do all things necessary on its part to be done to:

  1. Assign to Mr Watt the ownership, including sole administrator rights, of the website ‘bushchemist.com.au’; and
  2. Place the first applicant in the position of the registered owner of the business name ‘Bush Chemist’.

There be a judgment against each of the respondents for damages to be assessed.

 

Comment

The key takeaway from this matter is that, by:

  1. Making representations as to future matters on unreasonable grounds;
  2. Failing to make good earlier representations;
  3. Making fees that are not affordable or financially sustainable for franchisees; or
  4. Making representations to a potential franchiser to invest and participate in franchising structure and influence other potential franchisers, franchisors risk having their agreements being voided.

 

**Assisted by: Nicole Jackson**

 

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