Girchow Enterprises Pty Ltd v Ultimate Franchising Group Pty Ltd (Final Hearing)

This case arose from the rollout of three UFC Gym franchises in Australia: Balcatta, Blacktown and Castle Hill. The franchisor, Ultimate Franchising Group Pty Ltd, held the Australian rights under a Master Territory Agreement with a US franchisor, UG Franchise Operations LLC. Three separate corporate franchisees, together with the individuals behind them, said they were induced to sign franchise agreements and personal guarantees because of misleading or deceptive conduct in the sales process.

The Court identified the core complaint at the start of the judgment. The applicants said they entered into the franchise agreements, and gave guarantees supporting those agreements, because of conduct that was misleading within s 18 of the Australian Consumer Law. Most of the conduct complained of consisted of representations said to have been made by UFG through one of its directors, Mr Mazen Hagemrad. The main topics were future-looking ones: likely future income and likely establishment costs.

That makes this a practical franchise sales case. It is about what was said before signing, what financial expectations were created, whether those expectations had a proper basis, and whether the franchisees and guarantors acted on them when they committed to the businesses. The Court also noted that after the franchises opened, the franchisees compared their experiences and then raised concerns with UFG and its directors before proceedings were commenced.

The Court set out the parties in detail. For the Balcatta franchise, the franchisee was Girchow Enterprises Pty Ltd. Its director was Karim Girgis, and interests were also held by Sherif Girgis and Paul Chau. Each of those individuals gave a guarantee to UFG for the franchisee's obligations. For the Blacktown franchise, the franchisee was Activ Health Clubs Pty Ltd, with Richard Kim as director and shareholder together with Thi Ahn Tuyet Le. Guarantees were also given in support of that franchise, although Mr Le had been removed as a party by consent before the final hearing. For the Castle Hill franchise, the franchisee was Advanced Club Management Pty Ltd, with Laziz Mirdjonov as sole director and shareholder, and he gave a guarantee as well.

The respondents were UFG and its directors, Mr Hagemrad and Mr Samer Husseini. The Court said that although there was one proceeding, as a matter of substance there were three distinct cases. That is important because it shows the Court was not deciding a single abstract complaint about the franchise system. It was examining what happened in relation to each site and each group of applicants.

The extract also shows that some of the applicants had substantial commercial or gym experience. For example, Karim Girgis and Paul Chau had prior involvement in gym businesses, Richard Kim operated a multi-location allied health company, and Laziz Mirdjonov had founded his own gym business. The Court still had to decide whether, despite that experience, the applicants were induced by misleading conduct in the particular franchise sales process.

The central legal issue was whether the respondents engaged in misleading or deceptive conduct under s 18 of the ACL, causing the franchisees to enter into the franchise agreements and the individuals to give guarantees. The extract shows that the majority of the alleged conduct involved representations about future matters, especially likely future income and likely establishment costs.

That brought s 4 of the ACL into focus. The Court set out the statutory rule that a representation about a future matter is taken to be misleading if the maker did not have reasonable grounds for making it. The Court also explained that the section focuses on whether the representor in fact had reasonable grounds at the time, not merely whether some reasonable grounds could be imagined later. The judgment quotes authority explaining that the representor should be able to identify the facts or circumstances actually relied on before the Court decides whether those grounds were objectively reasonable and supported the representation made.

The Court also emphasised that s 18 is concerned with conduct as a whole, not isolated snippets. It is not enough to focus only on one line in a document, one sentence in a conversation or one email in a chain. The whole course of conduct up to the point of entry into the agreements and guarantees had to be examined, including what was done and not done, and what was said and not said. Something said early might later be corrected, or might cease to have causative effect, so timing and context mattered.

The most useful part of the available judgment text for business readers is the Court's explanation of how future-matter representations are assessed. Thawley J said the critical elements of s 4 in this case were that a representation about a future matter will be deemed misleading unless the respondent had reasonable grounds for making it, and the respondent will be deemed not to have had reasonable grounds unless evidence to the contrary is adduced. Even if some evidence is adduced, the Court still has to evaluate whether it is sufficient, having regard to the statutory purpose.

The Court stressed that the section is directed to the actual grounds relied on by the representor at the time. That is a serious compliance point for franchisors. It is not enough to say later that a forecast was commercially plausible or that there were some market reasons that might have supported it. The question is whether the person making the statement can identify the facts or circumstances they in fact relied on when they made it.

In practical franchise terms, that may mean being able to point to comparable site data, local market assumptions, membership ramp-up assumptions, fit-out quotations, equipment pricing, labour assumptions and a documented methodology. The judgment does not list those items as findings in this case, but the legal framework makes clear why unsupported optimism is risky. If likely income or likely establishment costs are presented to a prospect without a documented basis, the statement becomes much harder to defend if the deal later unravels.

The extract gives unusually direct comments about witness credibility, and those comments matter because franchise disputes often turn on pre-contract conversations and oral assurances. Thawley J did not find Mr Hagemrad to be a reliable or credible witness. The Court said he could not recall a number of events, that where he could recall events his recollection was often poor, and that his evidence was often in the form of argument. Mr Husseini was described as less deeply involved in the relevant events and as readily conceding that his recollection was not good.

By contrast, several applicant witnesses were accepted in strong terms. Karim Girgis was found to be credible, careful and straightforward. Paul Chau was considered credible and generally reliable. Richard Kim was described as an impressive witness whose evidence was accepted without reservation. Laziz Mirdjonov's reliability varied, but the Court generally preferred his recollection over Mr Hagemrad's.

The Court also made broader comments about affidavit evidence. It noted numerous accounts of conversations, often in direct speech, without sufficient attention to evidentiary caution. It also referred to criticism that the applicants' affidavit evidence on reliance was rudimentary, formulaic and expressed in identical or almost identical terms. Even so, the Court proceeded to determine the case and reached conclusions in favour of the applicants. For business owners, the practical lesson is simple: contemporaneous records matter. Emails, meeting notes, draft budgets, quotations, assumptions and version histories are usually more persuasive than reconstructed conversations years later.

The Court said the pleadings gave rise to 20 issues across four topics: liability, loss and relief, MSA fees and a cross-claim. The applicants' claim relating to MSA fees was abandoned in closing submissions. The cross-claim issues only arose if the applicants were unsuccessful in having the franchise agreements set aside. That means the real centre of the final hearing was whether the franchisees and guarantors had been misled into signing, and what relief should follow if they had.

The catchwords also show that damages were contested. The Court had to consider the appropriate quantification of losses where establishment costs had been spent setting up unprofitable businesses, including whether the value of the businesses when set up equalled the costs incurred in setting them up. The catchwords state that a referee report was adopted in part. That tells business readers that the case was not only about liability. It also involved the difficult question of how to measure loss when substantial startup expenditure has already been sunk into a business that does not perform as represented.

The orders reproduced in the available text are procedural rather than final quantified relief. On 5 May 2023, the Court ordered the parties to confer with a view to agreeing orders giving effect to the reasons and dealing with costs by 11 May 2023, with the matter listed on 12 May 2023 if there was any dispute about appropriate orders.

The Court's headline conclusion was decisive. Thawley J stated that each of the franchise agreements and guarantees should be set aside and that each corporate applicant was entitled to damages under s 236 of the ACL for losses sustained because of the respondents' contravention of s 18. The Court also said that issues 14 to 20 did not arise, because the MSA fees claim had been abandoned and the cross-claim only mattered if the applicants failed in setting aside the agreements.

For business readers, the significance of that outcome is twofold. First, the Court accepted that misleading conduct in the franchise sales process was serious enough to unwind both the operating agreements and the personal guarantees. Secondly, the corporate franchisees were not limited to rescission-style relief. They were also entitled to damages for loss caused by the contraventions.

The available text does not reproduce the full franchise-by-franchise reasoning or the final quantified orders. It also does not set out the exact damages figures. So the safe public reading is that liability and entitlement to relief were established in the applicants' favour, but the precise quantum and final form of consequential orders should be checked against the complete court record.

If you are buying a franchise, this case is a reminder not to treat sales material as a complete business case. Ask what supports any revenue forecast, membership projection or setup budget. Is it based on comparable sites? Are those sites genuinely comparable? What assumptions have been made about local demand, competition, staffing, rent, fit-out and opening timing? If the answer is vague, that is a risk signal. You should also review any guarantee with the same level of care as the franchise agreement itself, because personal exposure can be substantial.

If you are a franchisor, the case shows the danger of enthusiasm outrunning evidence. Directors, founders, brokers and sales staff should use approved materials and avoid unsupported verbal assurances. If a figure is only a scenario, broad estimate or aspirational target, it should not be presented as a likely outcome without proper basis and context. If assumptions change during the sales process, the prospect should be updated clearly and consistently.

The case also shows that a prospect's business experience is not a complete defence to a misleading conduct claim. Several applicants had meaningful commercial backgrounds, yet the Court still concluded that the agreements and guarantees were entered into because of misleading conduct. Experience may affect how evidence is assessed, but it does not give a franchisor a licence to make unsupported claims.

This page is based on the available Federal Court judgment text for Girchow Enterprises Pty Ltd v Ultimate Franchising Group Pty Ltd (Final Hearing) [2023] FCA 420, dated 5 May 2023. The available text includes the catchwords, orders, introduction, legal principles, witness observations and the Court's headline conclusions.

The available text is truncated before the full reasoning for each franchise and the detailed relief analysis are reproduced. Because of that, this page should be read as a careful case note rather than a complete account of every factual finding and every final order. In particular, the exact damages figures and the final form of consequential orders are not set out in the available text reproduced here.