Exam workshop

2013 FC Questions 2 & 3

Q 2
Material facts:
Include that RB buys a Success regional master
franchise after being told its system is a proven
one that experience from the USA suggested RB
should have no difficulty selling sub-franchises
and that enough qualified individuals would take
up sub-franchises. The agreement contains a
disclaimer which RB signs after getting legal
advice. RB rejects business advice due to his own
previous business experience.

Issues
Has there been a misrepresentation
Has there been misleading/deceptive conduct
Effect of disclaimer

Law

S 6 Contractual Remedies Act (CRA) - damages for
misrepresentation when inducing to enter
S 7 CRA can only terminate if misrepresentation AND
parties either agreed truth of reps essential or serious
effects from falsity
Misrep = statement of false facts OR opinion not
backed up by substratum of facts
Simpson v BBs / Valda Video case
S 4 CRA allows court to disregard disclaimer unless fair
and reasonable (3 factors: subject matter, bargaining
strength and legal advice)

Law contd

Fair Trading Act (FTA) s 9 (capable of being
misleading Actual deception reasonable to be
misled as per AMP v Heaven)
FTA cannot be contracted out of BUT
Disclaimer can break chain of causation
David case
FTA amendments (assume has contracted out):
Can contact out s 5D if fair & reasonable
Criteria bargaining disparity/ knowledge
unsubstantiated

Law contd
S 12 A(2) must be reasonable grounds for
representation whether or not actually false
or misleading
S 12 B regard to:
The nature of the goods, services, or interest in land in
respect of which the representation was made;
The nature of the representation (for example, whether it
was a representation about quality or quantity);
Any research or other steps taken by or on behalf of the
person before the person made the representation;

S 12B contd
the extent to which the person making the representation
complied with the requirements of any standards, codes,
or practices relating to the grounds on which such a
representation may be made, and the nature of those
requirements
The nature and source of any information that the person
relied on to make the representation;
The actual or potential effects of the representation on any
person;

Application
Can argue either that there was a representation that
the USA experience was transferable to the NZ market
or (per David) that it was unreasonable to assume this
since NZ was still a green fields market for Success.
However, the prediction that there would be sufficient
qualified sub-franchisees arguably lacks a factual basis
(Valda Video)
The number of sub-franchisees is fairly critical due to
the royalty payments RB would derive hence the
benefits are significantly reduced for RB of contract
entitling him to cancel

Application contd
However it is arguable he has not relied on the statements due to
his electing not to receive business advice due to his former
experience (see Dymocks). This would be fatal to RBs claim.
S 4 of the CRA allows court to disregard disclaimer criteria could
be argued either way
A FTA action could also be brought against parties associated with
contravention e.g. JR
However, it is arguable that while the statements were capable of
being misleading, it was not reasonable for RB to rely on them
It can also be argued that in fact RB did not rely on the statements
in any event
The disclaimer arguably breaks the chain of causation as per David

Conclusion
Can be either way but most likely one that RB
would be unsuccessful under current law. RB
may have additional remedies (notably
complaining to Commerce Commission) that
the franchisor is in breach of the new
unsubstantiated claims provision (s 12A) of
the FTA once this is enacted. The onus would
be on franchisors to demonstrate the
research/steps they have taken in the market.

Q 3
Material facts:
Include that GG has non-exclusive rights to the
territory, that the agreement has a right of first
refusal subject to certain conditions, that GG
wishes to advertise contrary to the Confidential
OM. and encourages other franchisees to
emulate his conduct. GG has also breached his
obligations to maintain standards under the OM
and is essentially free-riding on FFPs
reputation. The franchisor also intends not to
honour the first refusal provision.

Law
Promissory estoppel
Bond Brewing / Dymocks
Far Horizons/ Auckland Express Service Centre
Ltd v AA AutoService Ltd cases
Breach of contract : agreed essential terms s 7
CRA

Issues
Termination/ requirement to give prior notice
and act reasonably
Right of first refusal
estoppel

Application
Not granting the right of first refusal is within FFPs rights as GG is in
breach of OM hence fails to satisfy conditions for its exercise
closer to Far Horizons than to AA AutoService case
FFP has acted in good faith in this regard although GF not automatic
in NZ
However, GG is probably not in breach of clause J of the agreement
as his e-mail to the other franchisees inciting them to depart from
standards in OM was in response to FFPs suggestion that he
communicate with them so FFP might be estopped from relying on
breach of this clause as occurred in Dymocks
If FFP intends to terminate the agreement they would need to warn
GG of this possibility and give him an opportunity to rectify the
breaches as the OM promises this (see Dymocks) and it can be said
to be an express term or a term extrapolated from the OM.

Conclusion
FFP should not terminate without giving GG
an opportunity to rectify his breaches but is
probably entitled to not give GG the right of
first refusal.