Misleading or Deceptive Conduct

Misleading or deceptive conduct is the most commonly reported complaint by small business to the ACCC. While these complaints will not all relate to franchising issues, misleading or deceptive conduct complaints in franchising are common.

In the franchising sector, misleading or deceptive conduct complaints generally involve the allegation that a misleading or deceptive representation by the franchisor induced the franchisee to enter into the franchise agreement.

Specific areas of complaint include representations about:

• the current and future turnover of the franchise business;
• the current and future profitability of the franchise business;
• the level of current and future expenses of the franchise business;
• the likelihood of the success of the franchise business.

In this article we consider misleading or deceptive conduct and the remedies available.

Table of Contents

the australian consumer law

The two main laws applicable in franchising are:

1. The Franchising Code of Conduct; [What is the Franchising Code of Conduct?] and
2. The Australian Consumer Law.

The Franchising Code of Conduct

There are a number of areas which are covered by the Franchising Code of Conduct (the Franchising Code), including:

• Good Faith; [Good Faith in Franchising]
• Disclosure; [What is a Disclosure Document?]
• Franchise Agreements; [What is a Franchise Agreement?]
• Termination; [Franchise Agreement Termination] and
• Dispute Resolution [Dispute Resolution in Franchising].

The Australian Consumer Law

The Australian Consume Law (ACL) is a comprehensive set of laws that protect consumers and ensure fair trading in Australia. It came into effect on 1 January 2011 replacing the previous consumer protection laws in Australia. One of the key areas covered by the ACL is Misleading or Deceptive Conduct.

The ACL prohibits businesses from engaging in misleading or deceptive conduct, false representations and unfair practices. 

The ACL also deals with Unconscionable Conduct and Unfair Contract Terms.

What is Misleading or Deceptive Conduct?

The ACL provides that a person must not, in trade or commerce engage in misleading conduct or conduct which is likely to mislead or deceive.

Generally, conduct is "misleading or deceptive" if it induces or is capable of inducing error. However, the conduct must be considered as a whole and in context. 

Where the conduct is directed to the public or a section of the public, the Court will assess whether an ordinary or reasonable person would be misled or deceived by the conduct.

Puffery is not considered to be misleading or deceptive. A statement is "puffery" if it is wildly exaggerated, fanciful or vague. An example of a statement which is puffery is "we serve the best coffee in Australia".

Intention is not an element of misleading or deceptive conduct. This means that conduct can be misleading or deceptive even if the person engaging in the conduct believed that they acted reasonably and honestly.

In order to be considered misleading or deceptive, the conduct therefore must:

• induce or be likely to induce the error;
• be sufficiently connected to the error or misconception on the part of the other person;
• do more than cause confusion or questioning;
• be more than extreme of fanciful.  

The case of Guirguis Pty Ltd & Another v Michel's Patisserie System Pty Ltd & Ors (No 2) [2019] QDC 11 is an example where the franchisor argued that the representations that were made were just puffery. This case involved representations about the quality, range and the frequency of delivery of Michel's  products from Brisbane to Townsville.

The Court disagreed that the representations were puffery stating:

I do not accept that any of the established representations can be characterised as
mere puffery in the various contexts in which they were made. They were as to the
kinds of products to be supplied to a potential franchisee for retail sale by it, the
reliability and frequency of that supply from Brisbane and the quality of those
products upon their receipt in Townsville. They were significant definitive
statements.

misleading or deceptive conduct by Silence

Silence can also be misleading or deceptive, although it will depend on the circumstances of the case. Primarily the silence will need to occur where there is a reasonable or genuine expectation that a disclosure should be made.

Examples where silence may be misleading or deceptive include:

• where one person fails to alert another to facts known only to that person and the facts are relevant to the decision;
• where important details that a person should know are not conveyed to them;
• where a change in circumstance means that information already provided to a person is no longer correct.

In Hype Investments Pty Ltd and Sebastiano v Funk Coffee and Food Pty Ltd [2019] SADC 98, a franchisor provided a franchisee with turnover figures for a certain period, but failed to provide the franchisee with additional turnover figures that showed that the turnover had dropped. The Court found that in the circumstances, the franchisor had engaged in misleading and deceptive conduct by silence (or non-disclosure). The Court stated:

The action for misleading and deceptive conduct based on inaccurate turnover figures must therefore succeed on the additional ground that those figures were provided knowing they would be relied on, by failing to correct the position in circumstances in which there was a genuine expectation the true figures would be disclosed.

Guirguis Pty Ltd & Another v Michel's Patisserie System Pty Ltd & Ors (No 2) [2019] QDC 11 referred to above, is another example where the Court found misleading and deceptive conduct by silence, stating:

In my view, there were three factors that give rise to this reasonable
expectation of disclosure. First, the Guirguises had no previous franchise
experience and it was information that they were not capable of ascertaining in the
absence of it being disclosed by RFG. Second, during pre-contractual negotiations,
Mr Guirguis had expressly enquired about the achievability of delivering quality
stock from Brisbane to Townsville. Third, he had been assured that this would not
be a problem. It was therefore reasonable for the Guirguises to expect that if
uncertainties had emerged in relation to the supply of products from Brisbane, that
they would have been informed of this by RFG. The failure of RFG to disclose its
changed position, while continuing to negotiate the terms of the Franchise and
Related Agreements, was conduct in trade or commerce that led or was likely to
lead the plaintiffs into error. 

Misleading or Deceptive Conduct by Future Promises

Another common scenario in franchising matters are representations as to the future.

Representations as to the future often involve representations about future earnings. That is, a franchisor may advise a franchisee (before the franchisee enters into the franchise agreement), that the franchise business will turn over a certain amount or will make a certain amount of profit.

The ACL deems that representations about future matters are misleading or deceptive, unless the person making the representation had reasonable grounds to make it.

In Guirguis Pty Ltd & Another v Michel's Patisserie System Pty Ltd & Ors (No 2) [2019] QDC 11 the Court held:

The representations concerned matters relevant to operational issues of the
Patisserie in the event that the plaintiffs decided to enter into the Franchise
Agreement. Therefore, in my view, when considering the context in which they
were used as detailed above, each of them were representations with respect to
future matters.

Further the Court said:

I am not satisfied on the evidence that a reasonable basis for the making of the
various representations existed. There is no evidence that at the time the
representations were made, that RFG had delivered the said range of Michel’s
Patisserie products to locations as remote as Townsville. This was essentially
uncharted territory. The next most remote location in Queensland to which
Michel’s Patisserie products had been delivered was Yeppoon, which is more than
700 kilometres closer to Brisbane when compared to Townsville. There is no
evidence that any enquiries were made by Mr Metzakis or Mr Dellit as to the impact
that this additional distance would have on the kinds of Michel Patisserie products
that could be supplied, nor the reliability and frequency of that supply, nor the mode
of delivery and the quality of those products upon their receipt in Townsville. 

Reliance

Where the misleading or deceptive conduct relates to private statements (such as representations made by a franchisor to a franchisee before the franchisee enters into the franchise agreement) the franchisee will not obtain any remedies from the Court (such as damages or the setting aside of the franchise agreement) if the franchisee does not prove that it relied on the representation in entering into the franchise agreement.

For example, if what was represented by the franchisor was not believed or the franchisee knew the truth, then the franchisor will not have engaged in misleading or deceptive conduct.

Remedies for misleading or deceptive conduct

If a franchisor is found to have engaged in misleading or deceptive conduct the most common remedies are damages and the setting aside of the franchise agreement and related agreements.

In the examples of Guirguis Pty Ltd & Another v Michel's Patisserie System Pty Ltd & Ors (No 2) [2019] QDC 11 and Hype Investments Pty Ltd and Sebastiano v Funk Coffee and Food Pty Ltd [2019] SADC 98, the plaintiffs were awarded significant damages.

In addition, in both of the cases, while the respective franchisors claimed unpaid franchise fees, the respective Courts held the fees were not payable.

Other remedies available for misleading and deceptive conduct include injunctions and compensatory orders.

Key Takeaways

• misleading or deceptive conduct is covered by the Australian Consumer Law;
• whether conduct is misleading or deceptive will depend on the circumstances of the case;
• silence or non disclosure can be misleading or deceptive;
• future promises can be misleading or deceptive if there was not a reasonable basis to make them;
• a franchisee will not be entitled to any remedies, if the franchisee did not rely on the representation.

Disclaimer

The information in this article is general in nature and is not intended to address the circumstances of any person or other entity. Although we do our best to provide timely and accurate information, we do not guarantee that the information in this article is accurate or that it will continue to be accurate in the future.