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Beware telling fortunes

Feature Articles

Cite as: October 2012 86 (10) LIJ, p.28

Representations as to future matters need to be examined carefully before a decision can be made on whether they constitute misleading and deceptive conduct.

By Susan Gatford

Scenario 1: A franchisor promises a franchisee finance if the costs of his fit-out exceed $250,000. The franchisor subsequently reneges on the promise. Has the franchisor engaged in misleading or deceptive conduct?

Scenario 2: A franchisor tells a franchisee what he anticipates the turnover for a new franchise will be. His prediction is wrong. Has the franchisor engaged in misleading or deceptive conduct?

Scenario 3: A clinic represents that its treatments can cure cancer. The operator of the clinic (who is not a medical practitioner) believes that this is the case, but the medical profession disagrees. Has the clinic engaged in misleading or deceptive conduct?

According to the Victorian Court of Appeal the answers to these questions are “No”, “Yes” and “Yes” respectively. But according to the judges in the trials from which the appeals were brought, the answers were : “Yes”, “No” and “No” – the complete opposite. This article explores the reasons for these appellate court reversals and provides guidance for navigating what, judged by the incidence of successful appeals, appears to be one of the more commonly misapplied sections of the consumer protection legislation – representations as to future matters.

Section 51A

Under s51A(1) of the Trade Practices Act 1974 (Cth) (TPA)1 a representation is to be taken to be misleading if it is a representation with respect to any future matter and the maker of the representation does not have reasonable grounds for making the representation. Under s51A(2), the maker of the representation with respect to any future matter is to be deemed not to have had reasonable grounds for making the representation unless it adduces evidence to the contrary.

Franchising: the promise of finance

In Body Bronze International Pty Ltd & Ors v Fehcorp Pty Ltd,2 the owner of the Body Bronze tanning salons agreed to grant a franchise to Fehcorp. Body Bronze undertook that if the salon fit-out costs, which were to be met by Fehcorp, exceeded $250,000, then it would lend Fehcorp any additional funds needed for the fit-out at a flat interest rate of 10 per cent per annum (the finance arrangement).

During the fit-out Fehcorp told Body Bronze that the fit-out costs had exceeded $250,000 and asked for a loan. Body Bronze obliged. Later, a further invoice was received from the landlord in respect of the fit-out. Fehcorp asked Body Bronze for a further loan. Body Bronze refused and terminated the franchise when Fehcorp refused to pay the invoice without a loan being forthcoming.

The trial judge found that:

  • Body Bronze had represented that it would honour the finance arrangement;
  • Fehcorp relied on that representation and was thereby induced to enter the franchise agreement;
  • Body Bronze had not honoured the finance arrangement; and accordingly
  • Body Bronze had engaged in misleading and deceptive conduct.

The trial judge had found that at the time the representation was made Body Bronze was both able to and intended to honour the finance arrangement. The Court of Appeal noted that:

“It has long been held that the mere fact that representations as to future conduct or events do not come to pass does not make them misleading or deceptive even though the plaintiff has relied upon them and has altered his position on the faith of them. Insofar as his Honour concluded that s52 was contravened solely on the basis that Body Bronze failed to lend the money it said it would lend, after Fehcorp was induced to enter the Franchise Agreement on the faith of the representation, the conclusion was erroneous” (at [48]).

“Nevertheless, the representation relied upon is a representation as to future conduct, namely, that Body Bronze would, at some future point in time, lend funds to Fehcorp should a certain expenditure level be exceeded. A representation as to future conduct may contain an implied statement of existing fact, namely, that the promissor has a present intention to make good the promise, or that he has the means to do so. If such a representation is made when no intention or means to make it good exists, the representation may be misleading or deceptive. In this context the intention and belief of the representor is relevant” (at [49]).

“Section 51A of the TPA facilitates the proof of a contravention of s52 in respect of a representation as to future conduct by stipulating that such a representation made without reasonable grounds is taken to be misleading, and that unless the representor adduces evidence to the contrary it shall be deemed not to have had reasonable grounds for making the representation” (at [51]).

The Court of Appeal held that the trial judge’s findings that at the time the representation was made Body Bronze intended to honour the promise and had the means of doing so established that Body Bronze had, at the time, both:

  • the intention to do as it promised; and
  • reasonable grounds for making the representation that it made.

The outcome was that although Body Bronze was liable for breach of contract it had not engaged in any conduct in breach of the TPA. Accordingly its directors, who had been held at trial to be liable as accessories under that Act, were successful in their appeal.

A promise to do something in the future (in this case to lend money) can be characterised in two different ways; one involves the operation of s51A and one does not. First, such a statement can be a statement of present intention. In this circumstance s51A is not relevant, and the truth or falsity of the statement is to be assessed against evidence of the party’s intention at the time. Second, such a statement can be characterised as a statement as to a future matter, in which case s51A applies and mandates that the representor establish that it had reasonable grounds for making the statement.

Either way, on the facts in Body Bronze there was no misrepresentation.

Franchising: projected takings

In Trans-it Freighters Pty Ltd & Ors v Billy Baxters (Franchising) Pty Ltd,3 the franchisor’s representative discussed with Trans-It, the budding franchisee, the establishment of a Billy Baxters franchise in Jetty Road, Glenelg, South Australia. The representative was asked to predict the turnover of the new business. He said that he was running a Billy Baxters store in a different location, that his store’s takings were about $1,100,000 and that he knew of another store whose takings were $2,300,000–$2,500,000. He said that on that basis, and on the basis of its location in a popular beachside cafe strip, he expected that the new store would take in excess of $1,300,000 in its first year. He also sent the franchisee, under cover of a legal disclaimer, a spreadsheet in which he had entered figures which showed sales for the first 12 months totalling $1,365,000.

The trial judge held that the franchisor’s representative made the statements in the belief that they would turn out to be accurate, thus defeating a finding of misleading conduct on the first of the two approaches identified above. But that did not cover the second basis or the s51A requirement. For that, the court had to be satisfied not just that the representative believed what he was saying, but also that he had reasonable grounds for making the prediction that he did. In other words, an opinion, although honestly held, can still be actionable if it is found by a court not to be reasonably held.

The Court of Appeal analysed all of the evidence, some of which the trial judge had not considered, and found that there was a lack of reasonable grounds. Influential in the Appeal Court’s reasoning was evidence that the initial turnover figures for the “comparator” store (the one that the franchisor’s representative ran himself) were not $1,100,000 but were in fact well below this. Also, there was evidence that the representative had assumed from the fact that there were a lot of restaurants in the area where the new franchise was to be located that all such restaurants were profitable, an assumption that the Court found he had no grounds for making.

It is, of course, difficult for franchisors, who are always going to be asked by franchisees to estimate takings for new stores. Without giving some sort of predictions as to future turnover, attracting a new franchisee is likely to be difficult. But the upshot of the judgment is that if you are going to make predictions you need to do your homework first, not simply have a guess and rely on a legal disclaimer to protect you. You must make sure that facts on which your predictions are based that are within your knowledge (such as the takings of your own stores) are correct. You must also make sure that you are not assuming too much, e.g. that businesses you know nothing about are profitable. In other words, you can’t make a prediction unless it has a sound basis – at least not in trade and commerce. And if you think that’s a restriction on your freedom of speech you’re right, as the final case in the trilogy makes clear.

Fact and opinion

The Hope Clinic made all sorts of representations on its website about the treatments that it offered. The Health Services Commission had investigated the clinic and found that its treatments were either of no benefit or unproven in terms of efficacy. It referred the matter to Consumer Affairs Victoria (CAV), which identified more than 30 statements on the clinic’s website that it thought were misleading. CAV asserted that the net effect of those statements was that the Hope Clinic was representing that its treatments could cure, reverse or slow the progress of cancer, and also that its methods were evidence-based therapies that were supported by generally accepted science and published research findings.

At first instance,4 there was expert evidence, accepted by the trial judge, that the research on which the Hope Clinic relied failed the fundamental requirements of rigorous and scientific research. But the trial judge dismissed the CAV claims, holding that none of the statements was misleading. He characterised many of them as opinions which the Hope Clinic’s director, Professor Campbell, was entitled to express because they were honestly (if misguidedly) held.

The Court of Appeal had no difficulty in reversing that decision, and relied on s51A to do so.5 As an example, one statement was that the Hope Clinic’s techniques “are proving to be the best treatment option for patients that have previously failed conventional therapies”. The trial judge had characterised this as an opinion that Professor Campbell was entitled to express about the benefits of the treatments offered at the Hope Clinic, whether or not it was wrong by reference to conventional medicine and science.

The Court of Appeal noted that the statement could be either a fact or an opinion. It said that if characterised as a statement of fact it was palpably false, based on evidence accepted by the trial judge (the finding in the Health Services Commission’s report). If, on the other hand, the statement was characterised as an expression of opinion, then it was an opinion as to the therapeutic effects likely to be achieved by the Hope Clinic treatments and, consequently, a representation as to a future matter. Thus the Hope Clinic had to establish on the balance of probabilities that it had reasonable grounds for holding the opinion, i.e. that the therapeutic effects of its treatments were as it represented. The sources of evidence that the Clinic pointed to were publications which, on the evidence, themselves lacked scientific rigour and persuasion, and were thus insufficient to establish the asserted therapeutic benefits. The Court of Appeal accordingly found that the representation as to future matters that the Hope Clinic made, like the representations made by the Billy Baxters franchisor, lacked reasonable grounds.

The Court of Appeal also dealt with the freedom of speech issues that arose from the Victorian Human Rights and Responsibilities Act 2006 (the Charter), and specifically its freedom of expression provisions. It had to determine whether those provisions overrode the misleading conduct provisions of the Fair Trading Act 1999 (Vic), which was still in force at that time. In other words, did the enactment of the Charter mean that the Hope Clinic was now free to express its opinions, whether or not they were reasonably held? The answer from the Court of Appeal was a unanimous “No”. The Court recognised the restriction on freedom of speech that the Fair Trading Act imposed but said that the importance of consumer protection justified that restriction and was reasonably necessary to protect the rights of consumers not to be misled in trade or commerce. The Court of Appeal also dealt with the vexed issue of the interrelationship of ss32(1) and 7(2) of the Charter, which divided the High Court in Momcilovic6 – but that is a topic for another day.

What it all means

The essential messages from all three cases are similar.

For those engaged in trade and commerce, if you express an opinion as to what might happen in the future and someone relies on that opinion then you must, if challenged, be able to establish that there were reasonable grounds for holding that opinion at the time that it was given.

For lawyers, all three cases give useful directions as to the types of evidence that are most useful and the process of analysis of the asserted representations that needs to be undertaken, namely:

  • Is the representation a representation as to a future matter?
  • If not so expressly, can it be characterised as containing such a representation (e.g. an opinion that includes a prediction)?
  • If it can be characterised as “predictive”, did the representor believe at the time that what was predicted would occur?
  • If so, did the representor of a predictive representation have reasonable grounds for that belief?
  • What is the evidence that shows this?

Thus, misleading conduct cases are not as straightforward as they may at first appear. Rigorous analysis is needed to dissect and articulate the separate issues of fact and law that arise in them. This, perhaps, explains why the Court of Appeal has recently been so busy in this area.

SUSAN GATFORD is a member of the Victorian Bar practising in commercial, intellectual property and trade practices law.

1. Section 51A and its state equivalents (in Victoria the Fair Trading Act 1999 (Vic)) have since been repealed, but an equivalent provision now appears in s4 of the Australian Consumer Law.

2. [2011] VSCA 196; (2011) 282 ALR 571.

3. [2012] VSCA 71.

4. Noone, Director of Consumer Affairs Victoria v Operation Smile (Australia) Inc (No 2) [2011] VSC 153 (Pagone J).

5. Noone, Director of Consumer Affairs Victoria v Operation Smile (Australia) Inc & Ors [2012] VSCA 91.

6. Momcilovic v The Queen [2011] HCA 34; (2011) 280 ALR 221.


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