Former franchisee due $700,000+ after court rules on misleading conduct

By Sarah Stowe | 29 Oct 2015 View comments

A former franchisee in the Blow Dry Bar network was given misleading information before signing up to the franchise, and as a result is entitled to more than $700,000 in damages.

That's the ruling of the Supreme Court of New South Wales which has found in favour of Carazi, the trading business of John Giaimo, the Castle Hill former franchisee.

Justice White of the New South Wales Supreme Court found that both the franchisor company, and the founder and the sole director of Blow Dry Bar Franchising, Nathan Cuneen, had knowingly misled Carazi in reference to the profitability of other franchises in the network and as to the suitability of the location of the franchise outlet in Castle Hill.

Giaimo asked about profitability and had been told that all franchise outlets were profitable even though there was existing data that showed a number of the outlets were not making money.

Blake Palmer, partner and head of litigation at Baybridge Lawyers in Sydney said "This was an extreme example of misleading conduct on the part of the franchisor.  I say an “extreme” example, because Justice White essentially found that the plaintiff had been lied to, repeatedly, about the true financial position of the other established franchises. Giaimo was shown data that purported to represent earnings at other franchises. Yet, that data contained numbers that were a fantasy.

"Giaimo, a Queenslander who was unfamiliar with Sydney, was also told that the particular location at Castle Hill was going to be a “great site” for the franchise. The truth was that the site in question had very little passing pedestrian traffic. Because Cuneen was knowingly involved in the communication of the misleading conduct, the judgment was against not only the franchisor company, but also Cuneen personally. If he was not knowingly involved in the offending conduct, Cuneen would have been entitled to the usual protection of the corporate veil.”  

In relation to damages, Palmer said “The court found that the plaintiff was entitled to recover its start up costs (including the initial franchise fee and fit-out costs) and its trading losses.”

Carazi rescinded the franchise agreement in November 2013 and continued trading as De-Beaux Cheveux. Giaimo has been unable to re-assign the lease and sell the business. He had notched up a trading loss of more than $250,000 by June 2013.

Justice White has not shut the book on damages, allowing Giaimo to come back to court to claim further damages if he is unable to get out of the lease and continues to lose money.

However, Giaimo will have to take his claim to a trustee of bankruptcy in order to seek to have the judgment satisfied and receive the financial damages: Cuneen went into voluntary bankruptcy and sold the business before it went into liquidation in January 2015. Cuneen set up the US based Cherry Blow Dry Bar chain of franchises.

Two lessons to be learned

Putting aside the franchisor’s misleading conduct there are relevant points any franchise buyer should consider.

1.     Lack of knowledge about the location

The franchisee was based in Queensland and purchasing a Sydney franchise. It was not apparent that he did any research beyond his communication with the franchisor and was not familiar with the location.

Palmer says “Perhaps if he went on site and did his due diligence he would have realised this was not a Westfield, not a central location. Perhaps he would have made a better decision.”

2.     Accepting franchisor numbers

“Franchisees should be cautious. They are spending large amounts of their own money. They shouldn’t just accept the franchisor’s numbers when they see them on a piece of paper. If there are several shops in a network, go and observe them yourself, try to form your own view about how well they are operating” advises Palmer.