On 1 August 2024, the Magistrates Court of Queensland handed down its judgement in Peak Physique Franchisor Group Pty Ltd & Ors.

The Court found Peak Physique Franchisor Group Pty Ltd (Peak Physique) engaged in misleading and deceptive conduct and was in breach of section 18 Australian Consumer Law through its conduct which induced the purchase of one of their premises through representations of ongoing support to the franchisee and the profitability of the franchise purchased.

1. Background

Peak Physique, a franchisor of a hot yoga chain, commenced proceedings arguing that Gravity Rebellion Pty Ltd, one of their franchisees (Gravity) and Gravity’s guarantors Suzanne and Liam Burton (Burtons) had breached their franchise agreement.

Gravity and the Burtons submitted a counterclaim that any alleged breaches of the franchise agreement were a consequence of the Covid-19 restrictions imposed on the business and representations made by Peak Physique. Gravity and the Burtons submitted that these ongoing representations commenced prior to the signing of the franchise agreement during negotiations as to the terms. These representations related to claims of ongoing support from Peak Physique and the profitability of the franchise.

Peak Physique failed to attend the trial causing judgement on the matter to be determined solely in relation to the counterclaim and by way of affidavit evidence previously filed and served with the Court. 2. Issue

In considering the counterclaim the Court was required to consider whether Peak Physique engaged in misleading or deceptive conduct pursuant to section 18 Australian Consumer Law?

3. Findings and Reasoning

The Court determined that:

Peak Physique represented that ongoing support and assistance would be provided to Gravity throughout the duration of the franchise agreement.
Peak Physique represented that the franchise would be a profitable investment for Gravity.
Documents provided by Peak Physique, which were on display at the premises, contained misleading marketing representations to Gravity and to customers.

The Court was satisfied that Gravity and the Burtons relied on these representations in the running of the franchise, and in their conduct throughout the Covid-19 restriction period.

Peak Physique was found to be in breach of section 18 Australian Consumer Law due to the misleading nature of these representations and the reliance placed on them by Gravity and the Burtons. Damages were to be awarded to Gravity and the Burtons in respect of these breaches.

The prima facie measure of damages in relation to franchises, and where a party may have been induced to purchase a franchise, is an award of the difference between the purchase price paid and the actual value of the business at the time of acquisition.

Gravity pleaded the following losses:

Loss of Franchise fee of $33,000.
Cost of renting out business premises of $70,093.28.
Cost of acquisition of equipment of $3,433.82.
Trading losses of $95,380.

The Burtons made claims in respect of their unpaid wages from working within the franchise of:

$45,000 for Suzanne Burton; and
$30,000 for Liam Burton.

The damages claimed by Gravity and the Burtons totalled $276,907.10 which exceeded the $150,000 monetary limit of the Queensland Magistrates Court. As such, the Court awarded the maximum sum of $150,000 in damages to Gravity and the Burtons.

4. Takeaways

Franchisors should be aware of any representations they may be making in relation to the potential success of a business and how this is being communicated to potential franchisees. If references to success and profitability are being made to potential franchisees, franchisors should refer to the success of certain locations and note that they hope to see the same success in the new premises.

Franchisors found to have misled or deceived franchisees to induce the purchase of a business or premises will be liable for the payment of damages totalling the difference in the purchase price and the actual valuation price. To ensure this does not occur, franchisors should ensure that the valuation of any businesses has been completed appropriately prior to finalising the sale price with a franchisee. It is important that an independent valuation of the business occurs and is provided to the franchisee to substantiate the sale price.

Please contact us if you would like more information or would like to discuss any of the above:

Alicia Hill
Principal
T: +61 3 9611 0180 | M: +61 484 313 865
E: ahill@sladen.com.au

Inshani Ward
Senior Associate
T: +61 3 9611 0110 | M: +61 413 557 157
E: iward@sladen.com.au