Legal Insight Issue 12

Contents:

Retailing- Take care when advertising "sales"

Powers of Attorney- Conditions or Limitations on the Power must be strictly followed.

Court removes liquidator due to impartiality concerns

Franchising update

Be careful with your predictions… another franchisee succeeds in claims against a franchisor

Mutual Trust and Confidence and Dealing in Good Faith in Employment Relationships

Federal Court Decision regarding Franchising & Competition and Consumer Act

When retailers advertise their products for sale, words such as "save $X " or "saving" are often used.  Alternatively, products may be advertised at reduced prices for sale.

The Australian Competition and Consumer Commission ("ACCC") from time to time issues warnings to retailers about such advertising.

Earlier this year, the ACCC issued infringement notices to Furniture Galore Pty Ltd imposing penalties for advertising in catalogues and on the radio for goods "on sale" and at "reduced prices", implying that consumers could purchase goods for less.

The allegation by the ACCC was that such advertising was misleading or deceptive contrary to the Australian Consumer Law, when Furniture Galore had not sold or genuinely offered those products at the higher (or usual) selling price for a reasonable time before the advertisements.

In response to the ACCC's action, Furniture Galore agreed to certain enforceable undertakings.  These required Furniture Galore to publish corrective notices, implement a trade practices compliance program, provide an undertaking for three years to not make false or misleading representations in relation to the price of its products and publish various corrective notices.

This is a firm example of conduct which may infringe the requirements of the Australian Consumer Law to not engage in misleading or deceptive conduct in connection with advertising products at reduced "sale" prices. Hugh & Associates assists its clients with implementing trade practices compliance manuals as well as staff training in trade practices and consumer law.

The judgement of Gzell J in Power v Power (2011) NSWSC 288 (which deals with the principle of ademption) is a timely reminder that a person appointed under a Power of Attorney must be vigilant to ensure that conditions or limitations on the Power are strictly satisfied before attempting to exercise the Power.

In this case, the Power of Attorney included a condition that it could only be used upon the treating medical practioner of Judith Weir certifying that she was no longer physically or mentally able to sign documents or look after her own affairs ("Condition").  The Attorney (her son) two years before Mrs Weir passed away, signed a Transfer of certain property in Mrs Weir's name.  The son took no legal advice before signing the Transfer.  He had obtained (about 6 months before signing the Transfer) a letter from his mother's treating medical practioner which noted over the past 12 months a significant deterioration in her mental state and recent tests showed she was suffering from significant dementia and she may not be capable of looking after her own affairs.  Some four years later (in the context of litigation involving the late Mrs Weir's Estate) the same doctor provided a confusing report in terms of Mrs Weir's mental capacity at the time her son signed the Transfer.

Ultimately, His Honour did not decide whether Mrs Weir lacked the capacity to understand and approve the sale of the property as at the date her son signed the Transfer.

His Honour formed a view that the Condition required a certification from Mrs Weir's medical practioner, not a medical opinion.  As there was no such certification, His Honour found that Mrs Weir's son had no authority to act as his mother's Attorney.  His Honour therefore found that an exception (arising from the unauthorised act, purportedly under the Power of Attorney) to the principle of ademption applied.  It was thus possible for the executor of Mrs Weir's Estate to trace the proceeds of the unauthorised sale which were required to be repaid to the Estate, even though the property had been "sold" approximately two years before her death.

The salient rule from this judgment is that any condition or limitation in a Power of Attorney must be carefully considered and complied with.

A decision of Jessup J on 15 June 2012 in Haulotte Australia Pty Limited –v- All Area Rentals Pty Limited (In Liq) [2012] FCA 615 confirms that the Court will remove a liquidator if their independence is in question.  The following occurred in this case:

1. The Company's accountant (Accountant) asked X to accept appointment as administrator.  X had received three referrals from the Accountant within the last year.  X accepted the appointment.
2. A Creditor raised a concern at the First Meeting that the director, one week before the Company was placed into Administration, was trading the Company's business under a new name (NewCo) with payments being made to NewCo but the address and contact details were the same.
3. The Second Report to Creditors showed approximately $1,000.00 in cash was the only asset of the Company, notwithstanding a recent balance sheet showed trade debtors of approximately $700,000.00. 
4. The Company went into liquidation during the proceedings and the only relief ultimately pressed was the removal of X as liquidator.
5. The crux of the evidence before the Court was an internal document to the Accountant referring to the "assignment" from the Company to NewCo of the debtors and creditors which included debtors totalling approximately $600,000.00 and an application form signed by X, on behalf of the Company, for the transfer of its telephone number to NewCo.
6. The Court suggested that the relationship with the Accountant should be investigated and someone without such a relationship and someone who will not expect further work in the future should be appointed.  The Court was troubled by the lack of scepticism in X's Second Report to Creditors and his failure to explain what occurred with the Company's debtors (or investigate this sufficiently with the director and/or Accountant).
7. The Court also gave weight to the Creditor's offer of $10,000.00 (and possibly more) funding, which was conditional on X being removed as liquidator.
8. The Court accepted that X had done a considerable amount of work and was familiar with the matter, however, it was preferable that X be removed as there was "a risk that [X] might at some stage be embarrassed by what happened immediately before or during the administration…".
9. The Court effectively ignored the objection by 19 other creditors, finding that they were (or at least appeared to be) related or associated parties.

The ACCC by Report dated 7 October 2012 provided an update on the Franchising Code, a mandatory code under the Competition and Consumer Act, 2010 (Cth).

The ACCC recorded that in the financial year ending 30 June 2012 it received 636 franchising complaints.  Many concerned consumer protection, competition and Franchising Code related issues.  The types of complaints that generated the most complaints were:

1. Franchisors failing to provide disclosure documents to franchisees;
2. Misleading or deceptive conduct including false claims made by franchisors.  Often such complaints involve a franchisor making misleading representations about the income expected to be earned from operating the business.  The ACCC is investigating complaints made in the cleaning and home service industry, particularly where it is concerned that franchisors have been targeting people from non-English speaking backgrounds.
3. Increases in prices blamed on carbon pricing.  Such claims must be truthful and be based on reasonable grounds.  Two recent examples of enforcement outcomes in that area are:
   1. An undertaking given to the ACCC by Retail Food Group to the ACCC to not engage in conduct suggesting that franchisees could link retail price increases to the carbon price; and
   2. GFC Berwick Pty Limited paid a fine on an infringement notice issued by the ACCC in connection with representations made about the cost of gym memberships.

The ACCC's report provides an explanation on how the ACCC uses audit powers, including to compel franchisors to provide information or produce documents.  These powers can be used to obtain documents required to be maintained under the Franchising Code, for example, disclosure documents and franchise agreements.

The ACCC considers that stronger sanctions for infringements of the Franchising Code will deter those who do not operate within the requirements of the Code.  It will be interesting to see whether action is taken in the future to amend the Code or the relevant consumer laws.

The Victorian Supreme Court of Appeal (Appeal Court) has upheld an appeal by a franchisee (Company) and its guarantors (Guarantors) after the franchisor (Billy Baxters) terminated the Franchise Agreement (Agreement) for the Company's failure to pay service fees and advertising expenses.  The first instance decision found for Billy Baxters and rejected most of the Company's claims.

Facts

Billy Baxters made representations about a vacant block for a new Billy Baxters coffee shop franchise.  The Company entered into the Agreement and built a new Billy Baxters coffee shop.  The coffee shop did not do well.  Billy Baxters terminated the Agreement and sued for outstanding fees and damages.

The Company and Guarantors argued that Billy Baxters engaged in misleading and deceptive conduct and that they were not liable to Billy Baxters based on representations and that Billy Baxters amongst other things engaged in misleading and deceptive conduct.  The representations (Representations) were: rent for the site of $160,000 per year was reasonable, the projected turnover in the first year was $1.3million, a spreadsheet provided by Billy Baxters suggested sales in the first year in excess of $1.3million, net profit for the first year would be over $170,000.

None of the predictions in the Representations eventuated.   It is important to note that a representation about a future matter is deemed to be misleading unless the company which made the representation proves to the contrary – i.e. Billy Baxters had to prove that there were reasonable grounds for making the Representations.

Decision

The Appeal Court held that Billy Baxters did not have reasonable grounds for making the Representations, even though they were made in good faith and the opinions were honestly held.  It also held that the Company and the Guarantors relied on the Representations in entering into the Agreement, notwithstanding that the documents contained various notices, warnings, riders and disclaimers.

Lessons

1. Before you make a representation as to a future matter, ensure that there is a reasonable basis to support it.  If not, don't say it!
2. Keep evidence to support the reasonable grounds for making a prediction.
3. What is the overall impression of what you are saying?  If you represent something as an excellent business opportunity which will make $X per year and then provide documents which include a disclaimer or exclusion, you may still be liable for a misleading or deceptive representation.

The citation for this case is: Trans-It Freighters Pty Ltd & Ors –v- Billy Baxters (Franchising) Pty Ltd [2012] VSCA 71

In the recent decision of the Federal Court of Australia in Barker v the Commonwealth Bank of Australia ('Barker'), the Court recognised that in every contract of employment there is an

implied term of good faith and mutual trust and confidence.  The Barker decision is significant as it is the first decision that recognises that damages may flow from a breach of the implied term. 

Barker was an employee of the CBA and was selected for redundancy.  CBA had a policy applicable to employees selected for redundancy.  The policy provided for a number of alternative steps to be considered before an employee was made redundant.  Mr Barker successfully alleged that CBA failed to make sufficient efforts to redeploy him (which was required under CBA's policy) before retrenching him.  CBA's failure was alleged to constitute a breach of the implied term of mutual trust and confidence.  Mr Barker was successful and CBA was ordered to pay damages representing the 25% chance that Mr Barker would have been successfully redeployed and remained with CBA until retirement.  The amount awarded was $317,500.

The implied term of good faith and mutual trust and confidence requires both parties to act in good faith toward each other, to act fairly and to not, without reasonable and proper cause, conduct themselves in a manner likely to destroy or seriously damage the relationship of trust and confidence in the employment relationship.  The Court held that the breach needs to be a serious breach before it will be considered a breach of the implied term.  The decision confirms earlier decisions that an employer's policy can create expectations that employees will be provided with certain benefits and/or treated in a particular way.  If an employer fails to follow its own policy, this may amount to a breach of the implied term of good faith and mutual trust and confidence.

Examples of circumstances where an employee has claimed (although not always successfully) breaches of the implied term are as follows:-

• Where an employer has made dishonest or unjustified allegations against the employee;
• Where an employer has provided an employee with unjustifiable warnings in respect to his or her performance;
• Where an employer has refused to investigate a genuine and reasonable grievance made by an employee;
• Where an employer has failed to manage an employee's workload and provide them with proper support;
• Where an employer has unfairly (and/or unlawfully) selected a person for demotion;
• Where an employer has arbitrarily refused an employee a benefit made available to other employees; and
• Where an employer has refused to pay a discretionary bonus in circumstances where the employer's conduct in refusing to pay the bonus was capricious.

The Barker decision represents another encouraging step in employment law developing to recognise and accommodate the evolving employment relationship.

The recent decision in SPAR Licensing Pty Ltd –v- MIS QLD Pty Ltd (No. 2) [2012] FCA 1116 saw the Federal Court of Australia consider various claims made, inter alia, pursuant to the Competition and Consumer Act and Trade Practices Act.

Facts

SPAR and Metcash (and its subsidiary IGA) are fierce competitors who sell wholesale supply of groceries to supermarkets.  In July 2010, SPAR provided various documentation to MIS ("the Supermarket") pursuant to the Franchising Code (a mandatory industry code).  SPAR and the Supermarket subsequently entered into an agreement in December 2010 for the supply of groceries and then a franchise agreement in February 2011. 

In mid 2011, relying on representations said to have been made by SPAR, the Supermarket sought to terminate the two agreements and enter into an Alliance Agreement with Metcash/IGA.  In August 2011, SPAR obtained an interlocutory injunction restraining the Supermarket from terminating the franchising agreement or purchasing goods from any other person.

Claims

SPAR made claims for breach of contract and alleged that the Alliance Agreement breached the anti–competitive provisions of the Competition and Consumer Act.  The Supermarket cross-claimed alleging SPAR engaged in misleading or deceptive conduct and breached the Franchising Code.     

Result

The Supermarket was largely successful.  The Court asked the parties to prepare orders giving effect to the reasons, which:

1. Rejected SPAR's claims in respect of anti-competitive conduct;
2. Found SPAR had engaged in misleading and deceptive conduct in making representations as to the Supermarket's rights to terminate the two agreements (which provisions were not in fact incorporated into agreement);
3. Would vary the two agreements to incorporate express terms giving effect to the representations, rather than terminate the two agreements.  The Court noted that upon the Supermarket terminating the agreements it would be liable to pay SPAR the "termination and related fees" which were part of the representations made by SPAR;
4. Found that SPAR had not provided "current" financial documents, in breach of the Franchising Code, in failing to provide updated documents prior to entry into the franchise agreement; and
5. Contemplated a declaration as to SPAR's misleading and deceptive conduct and breach of the Franchising Code. 

John Vohralik (our Consultant Director) is a mediator on the Panel of Mediators of the Office of the Franchising Mediation Adviser and is a Nationally Accredited Mediator and has expertise in consumer law and franchising disputes.