Branch franchisees fail in a class action against the Bank of Queensland – Andrew Kirby and Kieran Hickie

Traderlight (NSW) Pty Ltd (ACN 108 880 968) & Ors v Bank of Queensland Limited (ACN 009 656 740) (No 17) and 13 related matters [2014] NSWSC 55

Case Note by Andrew Kirby and Kieran Hickie

The Bank of Queensland (BOQ) has recently won a large class action proceeding in the New South Wales Supreme Court.  The Bank successfully defended claims of misleading and deceptive conduct, unconscionable conduct and negligence brought by franchisees who claimed loss and damage caused by the failure of their franchise branches.

Background

The BOQ was the subject of a class action commenced by 11 franchisees who owned and managed BOQ branches in NSW.  Under the Bank’s corporate model, a person (or corporate entity) could apply to the Bank to own and manage a branch (OMB) of the BOQ as a franchisee.

The claims the subject of the class action arose from the BOQ’s expansion into NSW between 2004 and 2007.

The franchisees sued BOQ alleging misleading and deceptive conduct, unconscionable conduct and negligence, claiming that they suffered loss and damage as a consequence of entering their respective franchises which failed.

Misleading and deceptive conduct case

The misleading and deceptive conduct claims against BOQ centered on alleged representations made before the franchisees entered into their franchise agreements (pre-opening conduct), representations made after the franchisees had entered into their franchise agreements (post-opening conduct), and the failure of BOQ to disclose facts concerning the performance of other franchise branches.

The Court summarised the misleading and deceptive conduct case as follows (at [24]):

…at the heart of each case based on the pre-opening conduct is the allegation that the Bank represented that there were reasonable grounds for believing that, within a reasonable period of time, each metropolitan OMB should easily be able to write $4 million in loans per month, and each regional OMB $3 million in loans per month, and that that level of lending would be sufficient for each of the OMBs to become viable.  At the heart of the case, based on post-opening representations, is the allegation that at various times the Bank represented that other OMBs were doing well and that if the relevant manager and staff of the OMB put in more effort they should be able to achieve the target of $4 million of lending per month (in the case of the metropolitan branch) or $3 million (in the case of a regional branch).

[Italisised emphasis added]

In each proceeding Ball J held that BOQ did not engage in misleading or deceptive conduct, and the franchisees did not rely on any alleged representations made.  The Court largely did not accept the evidence of the franchisee plaintiffs concerning the representations alleged to have been made to them.It is beyond the scope of this note to detail all the Court’s findings.  By way of example, the Court placed considerable significance on the ‘Expression of Interest’ letter signed by each of the prospective franchisees before becoming a BOQ franchisee.  The letter set out the basis upon which the applicants would become franchisees, disclosed that the prospective franchisees would need to accept and manage important risks, and that they should think carefully about becoming owner-managers.  The letter recommended they obtain independent legal and financial advice, and required an acknowledgment that they had read and understood the contents of the letter.

Unconscionable conduct case

The franchisee parties also alleged BOQ engaged in unconscionable conduct in contravention of the Trade Practices Act 1958 (Cth).  The plaintiffs alleged that BOQ engaged in unconscionable conduct by making the representations (and failing to disclose information); incorporating terms which were unconscionable in the agreements; failing to provide proper “support” to the franchisees and by requiring the franchisees to enter into a “representative deed” at the time the franchise agreements were entered into, under which the franchisees acknowledged that they had not relied upon any representations made to them by BOQ.

The Court dismissed the plaintiffs’ unconscionable conduct claim.  The Court held that none of the claims identified circumstances which amounted to a special disadvantage or disability.  The Court held that the plaintiffs’ claims of asymmetry in information and inequality in bargaining power (vis-à-vis BOQ giving rise to a disadvantage or disability) were exaggerated. The Court held that the plaintiffs were invited to and did undertake their own enquiries, and were in a better position than BOQ to assess their ability to attract customers to a prospective franchise business.

Relevance of decision

This case and the recent ANZ banking fees case demonstrate that banking institutions are and will continue to be the subject of large scale litigation.  Aside from a banking context, this decision is another example of how difficult it is for plaintiffs in class action proceedings to successfully prosecute claims for misleading and deceptive conduct, particularly where oral representations are relied upon.  For franchisees, this case demonstrates the importance of undertaking sufficient due diligence in relation to the franchise venture before investing.

Andrew Kirby – CommBar profile, Kieran Hickie – CommBar profile