BOQ did not mislead or deceive former owner managers

The Court of Appeal of the New South Wales Supreme Court yesterday dismissed an appeal by a group of former Bank of Queensland branch franchisees, who had alleged they had been misled by the bank into taking on owner-manager contracts in NSW.

The appeal, with Traderight (NSW) as its lead plantiff, was heard by three judges: Chief Justice Thomas Bathurst, Justice Margaret Beazley and Justice Reginald Barrett.

The former owner-managers were appealing against a decision on 13 February 2014 by Justice Ball, with a subsequent judgment for money, where it was owed to BOQ by any franchisees, made on 14 April 2014.

BOQ was quick to respond, and said, predictably, that it was "pleased" with the Court of Appeal result, noting in a media release soon after the decision has published: "The decision followed an earlier 2010 Federal Court judgement which also found in BOQ's favour in relation to similar claims from another former NSW owner-manager, the bank's media statement added.

"Given the long-running nature of the legal proceedings, and the fact that the separate actions have all found in favour of BOQ, the bank looks forward to this matter being finalised as soon as possible."

A person involved in the appeal was contacted on behalf of the owner managers but declined to comment.

By way of background, in 2003, Bank of Queensland decided on an interstate expansion strategy using a bank branch franchise model that had been successful in its home state. In line with this plan, between August 2004 and April 2007, BOQ appointed a number of franchisees in New South Wales to undertake banking operations as its agents through "owner managed branches", which BOQ financed.

Some of these OMBs were unsuccessful and their proprietors suffered losses so large they were forced to cease trading.

In the lead up to this particular appeal, a total of 36 persons and companies had alleged the bank engaged in misleading or deceptive conduct in the course of the negotiation and establishment of the franchise agreements, actions that were prohibited under national and state trade practice rules.

Two types of allegedly misleading or deceptive conduct were before the primary judge: conduct by way of the making of particular statements or representations; and conduct in the form of maintaining silence in circumstances where it was said to be misleading or deceptive not to speak. The representations allegedly made were referred to as "target statements" and "break-even statements".

The claim of misleading or deceptive conduct by silence concerned was characterised as "pre-opening non-disclosure".

The "target statements" were, in broad concept, statements to the general effect that a metropolitan franchisee would need to write $4 million, and a regional franchisee $3 million, in new loans on average per month to have a successful business and that a franchisee ought to be able to meet those targets.

The "break-even statements" were statements to the general effect that if a franchisee wrote new loans to that level each month, there would be a break-even point of eight to 12 months. The statements were allegedly made in the course of introductory meetings at which Allsopp, a BOQ employee, presented prospective franchisees with an "expression of interest" letter, which he then went through with them.

There was also evidence that modelling to back up the bank's assertions over profitability was based on some unsupported information, such as the likely levels of mortgage lending and deposit-taking needed to achieve firstly, a break-even level, and then a profitable business.

The bank asserted the franchisee retained responsibility and liability for the success and viability of the branch and that BOQ could not give any assurances or make any predictions about matters like the costs, revenue or future profitability of the branch or the suitability of its location.

Other documentation provided by BOQ during the presale process stated that franchisees were responsible for assessing their own financial resources and capabilities to deal with the requirements of the franchise business, making enquiries about the franchise and the business of franchise, getting independent legal, financial and business advice and preparing a business plan.

The proceedings for the original trial ran for 101 hearing days in the NSW Supreme Court between September 2012 and October 2013, in front of Justice Michael Ball, whose decision was handed down on 13 February 2014.

Ball found in favour of the bank and ordered that the unsuccessful franchisees pay BOQ's costs. Ten franchisee groups appealed, citing 14 grounds of appeal. Of these, 11 were concerned with particular representations that the primary judge found had been made by BOQ to prospective franchisees.

These representations fall into three groups:
•    "target statements" (grounds 1 to 5),
•    "approval letter statements" (grounds 6 and 7) and
•    "break-even statements" (grounds 8 to 11).

The "target statements" were, in broad concept, statements made on behalf of BOQ to the respective franchisees to the general effect that, from BOQ's modelling, a metropolitan franchisee would need to write $4 million, and a regional franchisee $3 million, in new loans per month to have a successful business; and that a franchisee ought to be able to meet those targets.

The "approval letter statements", broadly expressed, were statements in BOQ's approval letters to successful franchise applicants that BOQ expected franchisees to be writing $4 million new loans per month. The "break-even statements" were statements allegedly made by BOQ to the general effect that, from BOQ's modelling, if a metropolitan franchisee wrote $4 million and a regional franchisee $3 million in new loans per month, there would be a break-even point of 8 to 12 months

The remaining grounds of appeal are concerned with "pre-opening non-disclosure" and the proposition that BOQ contravened statutory provisions by remaining silent on crucial details, such as the financial performance of other franchise owners in NSW.

In dismissing the appeal with costs, the Appeal Court found, firstly, that Ball was correct in his view that the "target statements" and "break-even statements" were not representations by the bank "with respect to any future matter", in particular the actual financial performance of a particular OMB (and if they had been, then trade law rules would apply).

This was because none of the BOQ executives or staff had any ready means of assessing whether the circumstances in a prospective OMB would operate would bear any resemblance to the assumptions on which the modelling was based, the court said.

In regard to BOQ's "silence" on the financial performances of other franchisees already in business, "taken as a whole", the Court said, "there could have been no 'reasonable expectation' on the part of prospective or recently signed-up franchisees that BOQ should take positive and unsolicited action to share with them information BOQ possessed about the financial performance and business levels achieved by existing franchisees."

This was because BOQ had made it clear, both orally and in writing, that
•    prospective OMBs needed to investigate the feasibility and viability of their own business proposal;
•    BOQ could not give assurances or make predictions about revenue or profitability of prospective OMBs;
•    prospective franchisees should talk to other existing franchisees; and,
•    the bank would facilitate introductions to other franchisees for that purpose.

The Court also agreed with the assertion by BOQ that any information it received about the financial performance of existing franchisees was "of a private or commercially sensitive nature" and if it was to be disclosed to an intending new entrant, the information should come from existing franchisees.

In fact, as the appeal court noted, several prospective franchisees accepted the position presented by BOQ and made approaches to existing franchisees with a view to obtaining relevant information from them.

The Court also observed that all the franchisees had businesses experience, mostly in banking - in fact, at least two of the group had worked in other BOQ branches.

"Viewed as a whole, the context was one in which the positive statements made by BOQ as to what was hypothetically possible in terms of OMB business generation were made to commercially sophisticated persons with business experience," the Court said.

"BOQ had made it clear, both orally and in writing, that it was for them to investigate the feasibility and viability of their own business proposal."