Franchisee's Due Diligence is Paramount, says Court Of Appeal

The judgement recognises that a franchise agreement is a commercial contract and has upheld the effectiveness of notices to those buying a franchise that they should get their own specialist legal, accountancy and financial advice. The Court of Appeal also determined that neither the franchisor or its director, Susan David, had misled the franchisee.

The Judgement (David and UAR Limited v TFAC Limited & Ors [2009] NZCA 44), delivered on 2 March 2009, contains much-awaited clarification of the effect of disclaimer and acknowledgement clauses and the application of the Fair Trading Act 1986 (FTA) to franchise agreements.

The Court's decision includes:

1. The franchisor's repeated notifications to the [prospective] franchisee to obtain specialist legal, accountancy and financial advice were effective;

2. A claim of misleading and deceptive conduct in breach of the FTA must be assessed at the time the alleged misrepresentations were made - "it was wrong, in principle, to have a retrospective evaluation of events" to establish that subsequent events prove that the representations were false; an

3. In any event, commercial contracts can be expected to reflect the parties' wishes as to allocation of risk and contracting out of the FTA may be permissible. From the initial contact with the [prospective] franchisee, the franchisor's documentation consistently informed the franchisee to take advice from a lawyer and accountant who specialised in franchising.

Additionally, the franchise agreement included certificates from the franchisee and its solicitor and accountant that advice had been obtained and understood before the agreement was signed.

The High Court's decision, which held that the documentation was ineffective to protect the franchisor, had been of great concern to the franchise sector, especially following the  Ketchell case in Australia. The Court of Appeal's judgement wholly exonerates the NZ franchisor. The Court of Appeal's upholding of the disclaimer and acknowledgement clauses recognises that franchise agreements are commercial contracts which are not easily avoided by claims of misrepresentation.

According to Christchurch solicitor Peter Woods, a partner in Anthony Harper & Co which represented James Home Services' NZ franchisor on the sale of the franchise, ‘There should be a collective sigh of relief within the franchise industry as this judgement has redressed the balance between franchisor and franchisee. I am familiar with the James Home Services franchise documents. They are perfectly clear and repeatedly inform the prospective franchisee to get independent legal, accountancy and financial advice. Additionally, the franchisee is required to provide certificates (including ones from a lawyer and accountant) that it has obtained and understood independent advice.'

‘In this case the franchisee obtained advice from franchise specialists and certified it understood that advice, including the risks involved with the business. Those specialists also certified that they had provided advice and that the franchisee had understood that advice. There was little, if anything, more that James Home Services could do to ensure that the franchisee properly evaluated the franchise and got proper advice. In those circumstances the High Court's decision, which effectively disregarded those notices and certificates, was of great concern for franchisors. The Court of Appeal's judgement has redressed the balance.'

For an alternative interpretation, see Second Opinion

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