By Warren Scott, Partner
This week the Federal Court ordered a $500,000 penalty against a franchisor company for breaches of the Australian Consumer Law (ACL) and the Franchise Code of Conduct (Code). The order confirms and gives effect to the Australian Competition and Consumer Commission’s (ACCC) promise to ensure compliance with the Code.
This case highlights the need for franchisors to have reasonable grounds before making representations about expected earnings and to advise franchisees to obtain independent advice prior to entering into franchise agreements. It also demonstrates that the Courts will pursue directors for their involvement in franchisor conduct.
Late last year the Federal Court held that South East Melbourne Cleaning Pty Ltd (in liquidation) (formerly Coverall Cleaning Concepts South East Melbourne Pty Ltd) (Coverall Melbourne) had engaged in misleading conduct, made false or misleading representations and contravened the Code.
The Court found that Coverall Melbourne had:
- provided a ‘franchise plan’ document to the franchisees when signing them up to the professional cleaning services franchise, which represented to them that they would earn specified monthly amounts;
- failed to notify the franchisees of the need to seek independent advice before entering into the franchise agreement; and
- failed to pay the franchisees for the cleaning services they had provided, which was in breach of the Coverall Melbourne franchise agreement.
The ‘franchise plan’ document
The Court said that Coverall Melbourne did not have a reasonable basis for making these representations. This constituted a breach of the ACL (misleading conduct), and a breach of the Code by providing earnings information which was not based on reasonable grounds.
Failure to pay amounts owed to the franchisees
The Court also said that failing to pay the amounts owed to the franchisees while also demanding payment of the initial franchise fee under the franchise agreement was, in the circumstances, unconscionable. The Court gave weight to the fact that Coverall Melbourne had significantly more bargaining power than the franchisees.
The Court found that Coverall Melbourne did not have in place, nor did it have a willingness to implement, a system for collecting payment and actually paying its franchisees.
Orders made by the Court
The Court declared that the franchise agreements between each of the franchisees and Coverall Melbourne were void from the date of the orders; and that Coverall Melbourne’s director was knowingly concerned in Coverall Melbourne’s unconscionable conduct.
In making its order for $500,000, the Court gave effect to the power under the newly revised Code to issue significant penalties and infringement notices for breaches of certain provisions of the Code.
With respect to the Coverall Melbourne director the Court ordered that he:
- pay a penalty of $30,000;
- compensate the two franchisees for the fee they were owed, which amounted to just over $23,000; and
- be disqualified from managing a corporation for 2 years, directly or indirectly.
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