7-Eleven wins lengthy legal battle with franchisee who was kicked out over cash-back scheme claims

A former 7-Eleven franchisee has lost a year-long legal bid to have his his franchise agreement reinstated, after the convenience store operator cancelled it when it discovered he was involved in a cash-back arrangement with employees.

In October 2016, 7-Eleven Australia notified the franchisee of a Sydney store that the franchise agreement he had entered into in 2011 had been breached because of alleged fraudulent behaviour, due to claims workers had been requested to pay back a proportion of their salaries to him in cash.

Two employees in particular said they had been required to hand some of their wages back in cash to the franchisee. But the franchisee took 7-Eleven to the Supreme Court of New South Wales in April 2017, alleging the cancellation of his franchise agreement was unlawful because there was not sufficient evidence that a cash-back scheme was ever in place, and the franchisee denied this practice had ever occurred.

In deciding the case, Justice John Sakar found that given the evidence of the workers, it was most likely the franchisee had acted “as alleged and in doing so was behaving fraudulently in the relevant sense”.

He found 7-Eleven was right to terminate the franchise agreement given the actions of the franchisee did amount to fraudulent behaviour.

In hearing evidence from both sides, Justice Sakar said this instance had led to the “conclusion there has been an entire breakdown of whatever trust and confidence the parties may once had reposed in each other”.

However, the franchisee was not willing to let the decision lie, taking the convenience store operator to the Supreme Court of New South Wales’ Court of Appeal, arguing that the original decision was wrong to have put so much faith in the evidence of employees, given there was not sufficient recorded information to indicate the scheme took place.

The franchisee claimed his own evidence was wrongly rejected because the Justice believed he had a “commercial motive to win the case”.

In deciding the application for appeal, the bench of the Court of Appeal did not give weight to this argument, recognising the workers had access to the compensation scheme established to help those affected by underpayments at 7-Eleven stores, and had little reason to give false accounts of their experiences.

One year on from the initial court action, the franchisee’s appeal was rejected, and he was ordered to pay costs.

In a statement provided to SmartCompany, 7-Eleven said it welcomed the court’s dismissal of the appeal. The company said the situation drew attention to the challenges in resolving issues like underpayments in the current franchise system. “This case serves to highlight the deficiencies with the current codes when it comes to both addressing underpayment issues, and ensuring that lesser-resourced franchisors would be able to take similar action,” the spokesperson said.

Disputes can be “pretty long and drawn out”

Franchise law expert and principal lawyer at Legalite, Marianne Marchesi, says cases like this show how dispute resolution can be a drawn-out process for franchisors, as well as franchisees.

“The court process is always pretty long and dragged out. That’s just the justice system, where there is a lack of funding,” she says. 

While it’s rare for franchisors to find themselves facing court action and appeals from franchisees, Marchesi says this case is a reminder to those operating in the space that communication is critical, because franchisees are able to object to any decision a franchisor makes to terminate an agreement even if they believe they are able to do this under the franchise code.

“There’s a lot that franchisors can do to prevent it from getting to that stage. You can attempt to get to a compromise or a resolution at the mediation stage,” she says. 

However, even in this case, the options for settling with a franchisee could involve giving them the chance to sell their business, or buying the business from them instead of an outright cancellation of your agreement, she says.

“Even if the franchisor feels they are in the right, it’s a decision you have to make about whether you want to spend hundreds of thousands of dollars in court [fighting a franchisee],” she says. 

Given this, Marchesi recommends all franchisors communicate with franchisees immediately if they spot any potential problems, like employee underpayments.

“When you see franchise relationships break down, it comes down to communication. So if you become aware that someone’s doing the wrong thing, ask them why — and whether there’s a reason for it that you might be able to help with.”

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