The Snap-on Tools case – a warning to litigious franchisees!
Nov 2015 |
JM & PM Holdings Pty Ltd v Snap-on Tools Australia Pty Ltd [2015] NSWCA 347
Introduction
The NSW Court of Appeal recently dismissed a claim by a franchisee who sued the franchisor for loss or damage because the franchisee was not able to prove that the loss or damage was attributable to the franchisor’s misconduct.
The case goes against the trend of many aggrieved franchisees successfully suing for damages based on allegations of the franchisor’s misconduct or misrepresentation.
The case background
Mr and Mrs Morgan operated through their company, JM & PM Holdings (franchisee) and bought a franchise from Snap-on Tools Australia Pty Ltd (franchisor). In the franchise documentation, it was accepted that the franchisor did not make any representation or promises about financial matters to the franchisee. The franchisee had nevertheless been given a spreadsheet from the franchisor giving cash flow projections. The franchisee took independent accounting advice on the spreadsheet before entering into the franchise agreement. The court distinguished the franchisee from the usual claimant being ‘plaintiffs of limited experience acting without professional advice in rushed circumstances’ because of the independent accountant’s timely advice on the projections given and the resultant implied understanding of the projections by the franchisee. The spreadsheet, without accounting advice, suggested that the franchisee would be expected to earn around $150,000 per year. However, applying adjustments advised on by the franchisee’s accountant, the court considered that this figure needed downwards adjustment, being something the franchisee would have known from meetings with the accountant.
The franchisee also took issue with the margin between the cost price of the franchised product and the expected retail price of the same. To this extent, ‘Snap-on Products’ had a cost pricing figure from the spreadsheet as well as an expected retail price, derived from cost and turnover figures in the spreadsheet. Again, the presence of independent accounting advice on the spreadsheet appears to have saved the franchisor from liability due to an alleged misrepresentation.
Observations
The case arose from a franchise agreement entered into in 2008. The franchisee’s claims were based on breaches of ss 52 and 51AD of the Trade Practices Act 1975 (Cth) (now replaced as s 18 of the Australian Consumer Law and clause 11 of the Franchising Code of Conduct (tied to s 51ACB of the Competition and Consumer Act 2010 (Cth)).
In the Snap-on case, the presence of independent accounting advice to the franchisee to allow interpretation and understanding of the subject projections in the spreadsheet was fatal to the franchisee’s case. The presence of the legal requirement for a franchisee to procure a certificate of independent advice (from an eligible adviser) was a requirement in 2008 (see Regulation 11 of the Trade Practices (Industry Codes – Franchising) Regulations 1998) and remains a regulatory requirement under the new Franchising Code of Conduct (effective 1 January 2015).
The independent advice certificate is a consumer protection element to protect consumers from being rash and to allow reflective advice to be given on a business venture (the franchise) that many consumers are ill equipped to understand. The Snap-on case highlights this certificate as also being a valuable defence mechanism for franchisors.
The case is unlikely to act as a deterrent to future franchisees that lose money and attribute their losses to the franchisor. However, the case highlights that the independent advice certificate could be a franchisee’s first hurdle to overcome.