The case of Girchow Enterprises Pty Ltd v Ultimate Franchising Group Pty Ltd [2023] FCA 420 illustrates that franchisors who communicate unsubstantiated financial projections risk breaching the misleading and deceptive conduct provisions of the Australian Consumer Law (ACL). The Federal Court’s decision also underscores the potential for franchise agreements and guarantees to be set aside, and for significant damages to be awarded where misleading conduct is found.

Background

This case arose from disputes involving several franchisees who entered into agreements to operate “Ultimate Fighting Championship Gym” (UFC Gym) franchises in Australia after the franchisor obtained the Australian rights to the brand and began marketing franchise opportunities to prospective business owners.

As part of its marketing efforts, the franchisor and its directors were alleged to have made various representations regarding the expected costs of establishing a UFC Gym franchise and the projected financial performance of the business. These representations were claimed to have included anticipated start-up and fit-out costs, membership numbers, and revenues, all of which were presented during information sessions and in subsequent communications.

After entering into the franchise agreements and launching their businesses, the franchisees found that the actual costs of establishing a UFC Gym were significantly higher than represented and the income projections provided by the Franchisor were not realised.

The franchisees commenced proceedings alleging that they had been misled and deceived in breach of section 18 of the ACL and sought to have the franchise agreements and personal guarantees set aside, along with damages for their losses.

The Court’s Reasoning

The Federal Court assessed that many representations alleged to be misleading and deceptive were with respect to future matters. Under section 4 of the ACL, representations with respect to any future matter are taken to be misleading unless the person making the representation had reasonable grounds for doing so.

In the case of section 4, the burden first falls on the representor to produce evidence of those reasonable grounds; if none is provided, the representation is automatically misleading. Even if some evidence is put forward, it must be sufficient to demonstrate that reasonable grounds existed.

For many of the Franchisor’s projections that turned out incorrect, the Court found that evidence suggesting reasonable grounds was lacking. The Franchisor in several instances claimed to have drawn on their general “experience” in the gym industry to inform their representations, however, the Court ruled this was not enough to uphold a defence of reasonable grounds.

In other instances, the Franchisor erred in providing prospective franchisees with inaccurate information. The Franchisor indicated to Franchisees that they would have preferential deals with suppliers despite not having finalised arrangements with suppliers. This was held by the Court to be misleading. The Court also found the franchisor misrepresented UFC Gyms as “proven businesses” when, in fact, many locations were not profitable at the relevant time.

Outcome

The Court considered the totality of representations made by the franchisor and its directors and found several to be misleading and deceptive. It ordered all three franchise agreements and associated guarantees to be set aside and awarded over $5.1 million in compensation to the franchisees.’

One director successfully appealed his personal liability in later proceedings, on the basis that his individual conduct could not have caused the franchisees' reliance. However, the findings and financial orders against the other respondents were upheld.

Key takeaways

If you are a franchisor trying to attract new franchisees:

Be transparent with any financial projections – only provide cost or income estimates that are backed by solid data or actual experience and if there are conditions or requirements attached to that data or experience ensure these are clearly communicated.
Avoid vague or verbal assurances – informal comments can carry legal weight, especially when they relate to profitability, costs, or business viability.
“Close enough” is not good enough – templated or generic communications may mislead if they do not reflect the actual position of your business model, supplier arrangements, or setup requirements.
Support every forward-looking statement with real evidence – whether in marketing pitches, disclosure documents, or conversations, ensure projections are grounded in fact, not assumption.

If wish to discuss the above or any other legal matters pertaining to franchising further, please contact:

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

Jake Cole
Senior Associate
T: +61 3 9611 0112 | M +61 413 557 157
E: jcole@sladen.com.au

Ben Ponte
Law Clerk
E: bponte@sladen.com.au