In a recent decision, the Supreme Court of Victoria has held that 7-Eleven engaged in misleading or deceptive conduct in contravention of s 18 of the Australian Consumer Law (ACL), which induced the plaintiffs to enter into a franchise agreement.
Background
Lanhai Pty Ltd v 7-Eleven Stores Pty Ltd [2022] VSC 132 concerned the length of the franchise term for the 7-Eleven store in Heathmont, Victoria. 7-Eleven was the lessee of that store under a lease that had a primary term expiring in mid-2021, with a five-year option to renew. In early 2021, 7-Eleven elected not to exercise the option to renew the lease. The plaintiffs had become the franchisees of that store in 2015 when they entered into a franchising agreement with 7-Eleven. The dispute between the parties centred on whether in 2015, 7-Eleven had represented to the plaintiffs that they would be franchisees for a minimum of 10 years. 7-Eleven argued that it had not, and that the franchise agreement had made clear that the franchise term would expire on the earlier of (a) the expiration of the primary term of the lease for the store if 7-Eleven decided not to exercise the option to renew or (b) ten years.
In May 2014, one of the plaintiffs, Ms Li, enquired about franchise opportunities with 7-Eleven.
The following month, she and her husband, Mr Wang, met with Mr O’Hara, 7-Eleven’s Franchise Development Manager for Victoria. They discussed franchise opportunities, the standard franchise term, and the financial model that 7-Eleven used for profit share. Mr O’Hara recorded notes on a piece of paper which he used to explain the 7-Eleven model with Ms Li and Mr Wang (‘the Handwritten Note’). The parties disputed the meaning of a diagram that Mr O’Hara had drawn to explain the franchise term, and what Mr O’Hara had said when making those annotations. Mr O’Hara also provided them with a document titled “Franchise Opportunities”. In August that year, Mr O’Hara provided the plaintiffs with an updated version of that document.
The Franchise Opportunities document referred to the franchise term for the Heathmont store as being ’10 years’. The franchise term for other stores was listed as ‘As per lease’. There was an explanatory note on the Franchise Opportunities document that purported to explain the distinction.
Misleading and Deceptive Conduct
Riordan J held 7-Eleven’s conduct to be misleading as it had ‘a sufficient tendency to lead a person exposed to the conduct into error,’ referring to the formation of an erroneous assumption in relation to the term of the franchise agreement.
His Honour considered the effect of the explanatory note in assessing whether the Franchise Opportunities document tended to lead a person exposed to form an erroneous assumption.
Referring to principles in Downey v Carlson Hotels Asia Pacific Pty Ltd, which discussed the circumstances in which a disclaimer could erase misleading representation in a document, his Honour held the explanatory note did not absolve the defendant of its misleading conduct as to the term of the franchise agreement for the following reasons (amongst others):
- On its face, the Franchise Opportunities document recognised d that a prospective franchisee would be investing many hundreds of thousands of dollars to acquire a franchise businesses for sale. The disparity between a 10-year term and a lesser term was very significant.
- The explanatory note was not featured prominently on the document. It was in small print and was worded in a confusing manner. It would be difficult for a lay person to understand, even one whose first language was English, much less Ms Li and Mr Wang for whom English was not a first language.
- The explanatory note was not brought to the plaintiff’s attention at all. In fact, Mr O’Hara did not contend that it was part of his standard practice to bring the explanatory note to the attention of prospective franchisees.
Inducement
Riordan J was satisfied that but for the franchisor’s misleading and deceptive conduct the plaintiffs would not have entered into the franchise agreement and would have pursued opportunities to buy another business such an Australia Post outlet.
Damages
The decision confirmed that it is not necessary for a plaintiff to limit its damages claim to one particular opportunity. Riordan J held that the lost opportunity in this case was the opportunity to pursue the series of ‘cascading’ opportunities. Calculation of loss consisted of an exercise in an estimation of possibilities, not proof of probabilities.
The defendant was ordered to pay damages pursuant to s 236 of the ACL in the sum of AU$595,246.40.