Franchisees and franchisors have been urged to do as much as “humanly possible” to scope each other out before entering into an agreement, as a court battle kicks off involving 10 former Bank of Queensland franchisees.
In what will be a nationally-watched case, 10 former Bank of Queensland owner-managers are seeking damages because of business losses. The case begins today in the NSW Supreme Court.
The claims relate to alleged representations made about the likely business and profitability of the owner-managers’ branches. It’s understood BoQ will contest the claims.
According to investment law expert Charlie Gollow, BoQ made promises about revenue and new business during an expansion by the bank that was developed in 2005.
Jason Gehkre, director of the Franchise Advisory Centre, says the case should serve as a reminder not only for franchisees but for franchisors.
“The issue for any franchisor is to be very aware of any representations made during the recruitment process,” Gehrke says.
“For any franchisee who is undertaking due diligence, they should be testing any representation made to them before entering into a franchise agreement.”
With regard to the BoQ case, Gehrke says it is “difficult to say which way the cat’s going to jump”.
“This is in relation to matters that occurred several years ago, and one of the most common reasons franchisors get themselves into litigation with franchisees is usually around claims made at the time the franchisee was recruited, which haven’t been met by the reality of running the business” he says.
“In proving the misrepresentation claims, it comes down to the quality of the evidence.”
“Franchisors who make representations based on existing facts in their business are less likely to be caught up in this kind of litigation.”
The news comes several months after restaurant franchise Billy Baxter’s was placed into provisional liquidation after struggling to pay a $1.2 million damages claim.
The claim is owed to Ross and Sue Pollard for the collapse of their franchise in Adelaide suburb Glenelg.
The franchisor’s representative, Phillip Mauviel, anticipated a turnover for the business of $1.3 million, and suggested turnover would allow the business to pay the rent and return a profit.
However, the Pollards’ franchise suffered losses, which meant they were unable to pay the fees due under the franchise agreement.
They then terminated the franchise agreement, which led to a lengthy legal battle. In the end, the Pollards were awarded $1.22 million in damages.
Gehrke says the BoQ case will hopefully serve as another reminder of the need to undertake appropriate due diligence.
“Over the years, there have been several cases like this… Each case serves as a reminder to franchisees and franchisors to be properly mindful of the recruitment process,” he says.
“If both parties are looking to go into a long-term relationship together, they should be doing as much as humanly possible to scope each other out beforehand.”