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

This Federal Court matter arose out of a dispute connected with the UFC Gym franchise. The available judgment is not a full merits decision. It is a final-orders judgment with short reasons explaining a few remaining issues. Even so, the orders reveal a commercially significant result. Three franchise agreements were unwound, related personal guarantees were also set aside, substantial compensation was ordered, a cross-claim was dismissed, and the Court dealt closely with how one franchisee's losses should be recalculated.

The parties included multiple applicants and multiple respondents. The first respondent was Ultimate Franchising Group Pty Ltd. The second and third respondents were Mazen Hagemrad and Samer Hussieni. The orders also refer to a fourth respondent, Membership Services Australia Pty Ltd, against whom the applicants' claims were ultimately dismissed. On the applicant side, the orders identify corporate applicants and individual applicants, with some of the individuals having signed personal guarantees in support of the franchise arrangements.

What the short judgment does not provide is the full factual narrative of what happened in the franchise relationship or the complete legal reasoning that led the Court to declare the agreements void. The judge expressly said that reasons for judgment had already been delivered on 5 May 2023, and the matter on 12 May 2023 was listed for the making of final orders. That means the final result is clear, but the fuller explanation of the underlying conduct is not available on this page.

The Court identified three franchise agreements. The first was between the first applicant and the first respondent, executed on 14 March 2023. The second was between the fifth applicant and the first respondent, also executed on 14 March 2023. The third was between the eighth applicant and the first respondent, executed on 15 September 2017. Each of those agreements was declared void with effect from 22 May 2023.

The Court then dealt separately with the guarantees. The personal guarantees given by the second, third and fourth applicants in respect of the first applicant's franchise agreement were declared void ab initio. The personal guarantee given by the sixth applicant in respect of the fifth applicant's agreement was also declared void ab initio. So too was the personal guarantee given by the ninth applicant in respect of the eighth applicant's agreement.

That distinction is important. The franchise agreements were declared void with effect from a specified date, 22 May 2023. The guarantees were declared void ab initio, meaning from the beginning. A business reader should not collapse those two ideas into one. The orders use different language for a reason, and the practical legal effect may differ depending on the document in question.

The compensation orders were substantial. The first, second and third respondents were ordered to pay $1,789,848.99 to the first applicant, $1,955,996.29 to the fifth applicant, and $1,485,643.10 to the eighth applicant. Each amount was inclusive of interest to 12 May 2023. The Court also reserved liberty to apply in relation to matters arising from the first, fifth and eighth applicants' exit from the UFC Gym franchise, which indicates there could still be practical implementation issues after the main orders were made.

One of the most useful parts of the judgment for business owners is the Court's treatment of loss evidence. The parties had agreed to the appointment of a referee to quantify losses. The judge said this was done to reduce costs and delay and to facilitate a shorter and faster hearing, rather than having experts called by all sides. That is a practical litigation choice many commercial parties make.

The problem arose with the eighth applicant's operating losses and borrowing costs. The referee had asked the eighth applicant for a list of any income received or expenditure included in the financial accounts that did not relate to business operations. Through its solicitors, the eighth applicant answered that there was no such income or expenditure. The judge later said that answer had proven incorrect, at least to the extent established during the ninth applicant's cross-examination.

The respondents argued that there should be no further referral to the referee. Their position was that the eighth applicant had already had opportunities to prove its losses through lay witnesses, its expert and the earlier referral process, and there was no reason to think a further opportunity would produce more accurate or reliable information. The judge said there was significant sympathy for that view.

Even so, the judge was satisfied that significant losses had in fact been sustained by the eighth applicant and that it would not be a just outcome for no award to be made in respect of operating losses or borrowing costs. The judge noted that the operating losses claimed by the eighth applicant were more than twice those claimed by the other two corporate applicants. There may have been reasons for that, but because cross-examination showed that unrelated expenses had been claimed, the judge was not able to be satisfied that the referee's report on those losses was accurate.

The Court therefore remitted the assessment back to the referee under rule 28.67(1)(c) of the Federal Court Rules 2011. The referee was directed to exclude expenses unrelated to the Castle Hill UFC Gym franchise business, including meeting expenses, national and international travel expenses, interest and operating expenses in respect of motor vehicles, and any other personal or unrelated expenses. The referee was to be given the sealed orders, the 5 May 2023 reasons, the transcript of the ninth applicant's cross-examination about the accounts and expenses, and Exhibit 12. The referee was to file a report by 31 May 2023, and the proceeding was stood over to 8 June 2023 to consider adoption of that report and any further orders.

The Court also ordered that the further costs of the referee be borne solely by the eighth applicant. That is a practical reminder that if your accounting material is inaccurate or contaminated by personal spending, the court may still allow a further process to reach a fair result, but you may pay for the extra work caused by the problem.

The judgment also shows how procedural choices can affect costs. The respondents submitted that there should be no order as to the costs of the cross-claim because it did not need to be determined. The judge rejected that submission. The reason given was straightforward: the parties had to address the cross-claim, and it only became unnecessary because the Court had reached the conclusion that the franchise agreements should be declared void. The cross-claim was dismissed, and the respondents were ordered to pay the applicants' costs of and incidental to the proceedings, including the costs of the cross-claim.

The costs order against the first, second and third respondents was significant. In the absence of agreement, those costs were to be taxed on a party and party basis up to 11:00 am on 9 March 2020 and thereafter on an indemnity basis. For business litigants, that is a reminder that costs exposure can escalate sharply depending on how a matter develops and what the Court considers appropriate.

The fourth respondent was treated differently. The judge identified the fourth respondent as Membership Services Australia Pty Ltd. The applicants had opened a case against that party, relied on several affidavits solely or largely devoted to that claim, and cross-examined deponents, but then abandoned the case in closing submissions. The judge accepted the fourth respondent's submission that costs should follow the event. The claims against the fourth respondent were dismissed, and the relevant applicants were ordered to pay that respondent's costs.

There is a small inconsistency between the short reasons and the formal orders about which applicants were to pay the fourth respondent's costs. The formal order states that the third, fifth and eighth applicants are to pay those costs. The short reasons refer to the first, fifth and eighth applicants. For public purposes, the formal orders are the clearest statement of the operative result, but the inconsistency is worth noting for anyone checking the record closely.

If you are a franchisee, this case is a reminder that the franchise agreement and any personal guarantee should be reviewed together. The operating company may sign the franchise agreement, but individuals are often asked to support the arrangement personally. Here, the Court made separate orders about the franchise agreements and the guarantees, and used different language for each. That alone shows that guarantees are not just administrative attachments to the main deal.

If you are a franchisor, the case shows how serious the consequences can be when a dispute reaches final orders. The Court was prepared to declare franchise agreements void, set aside guarantees, award compensation and make substantial costs orders. Because the fuller reasons are not available here, this page cannot safely identify the exact legal basis for that result. But the outcome itself is enough to show that franchise documentation, sales conduct, disclosure and dispute management all need to be able to withstand close scrutiny.

If you are involved in litigation, the referee issue is especially practical. A court may be willing to use a referee to save time and cost, but that process still depends on reliable records. If your accounts mix business expenses with personal or unrelated spending, you risk delay, extra cost and reduced confidence in your loss claim. In this case, the judge accepted that significant losses had been suffered, but still required a further referral because the earlier material could not be accepted as accurate.

There is also a broader litigation lesson about parties and claims. The applicants had to pay the fourth respondent's costs after abandoning their case against that party. That is a reminder to think carefully before adding respondents or running claims that may not ultimately be maintained.

The judgment was delivered on 12 May 2023 and published on 19 May 2023. The judge said that substantive reasons had already been delivered on 5 May 2023. The final orders required the referee to file a further report by 31 May 2023 and stood the proceeding over to 8 June 2023 to consider adoption of that report and any further orders. The orders also required any notice of appeal to be filed on or before 12 June 2023.

The main limitation for readers is that the available material is a final-orders judgment with only short reasons. It clearly records the operative orders and some procedural reasoning, especially about the referee, the cross-claim and costs. It does not fully explain the underlying legal reasoning for declaring the franchise agreements void. That means the case can be used confidently to explain the result and the practical litigation points, but not to make a precise statement about the substantive law without checking the fuller reasons.