30/03/2015

The Federal court has ordered a franchisor to pay $500,000 for breaches of the Franchising Code.

This article is reprinted with the kind permission of the ACCC.

In a decision on 24th March the Federal Court ordered a $500,000 penalty against South East Melbourne Cleaning Pty Ltd (in liquidation) (formerly Coverall Cleaning Concepts South East Melbourne Pty Ltd) (Coverall Melbourne) for breaches of the Australian Consumer Law (ACL).

Coverall Melbourne was the Victorian franchisor of a national professional cleaning franchise system.
 
The decision is an important reminder to franchisors to ensure that their franchise system complies with both the Australian Consumer Law and the Franchising Code of Conduct.

The Court found that Coverall Melbourne had engaged in unconscionable conduct, made false or misleading representations, and had contravened the Franchising Code of Conduct in its dealings with two individuals who were prospective franchisees and subsequently signed up to the cleaning franchise.
 
The Court found that Coverall Melbourne had made false or misleading representations concerning the income that the two prospective franchisees would earn. The Court also found that Coverall Melbourne had contravened the Franchising Code by providing this false or misleading information to the two individuals and by failing to notify one of the franchisees of the need to seek independent advice before entering into the franchise agreement.
 
Additionally, by failing to pay the franchisees for the work they had completed and continuing to demand payment for the initial franchising fee, the Court found that Coverall Melbourne had engaged in unconscionable conduct.
 
"By imposing a penalty of $500,000, the Court is seeking to deter other franchisors from engaging in similar conduct. This is a clear message that franchise businesses must ensure they comply with their obligations under the Australian Consumer Law and Franchising Code of Conduct," ACCC Deputy Chair Dr Michael Schaper said.
 
Justice Murphy had found that Coverall Melbourne "did not have in place a business system capable of collecting payment and actually paying its franchisees on time…nor did it have a willingness to implement such a system and to pay franchisees in accordance with their entitlements."
 
In relation to Coverall Melbourne's contraventions of the Franchise Code of Conduct, His Honour noted that Coverall Melbourne "gave scant regard to the requirement that franchisees should be fully informed and given the opportunity to be independently advised before committing to the purchase of a franchise business".
 
Orders were previously made against Coverall Melbourne's former director, Brett Jones, including a $30,000 penalty and an order disqualifying Mr Jones from managing a corporation for 2 years.
 
His Honour considered Mr Jones' conduct to have "reflected a lack of understanding of the proper role of a company director in relation to the legal obligation owed by a franchisor to its franchisees." His Honour also noted that Mr Jones "employed unfair tactics in his dealings [with franchisees] to preserve Coverall's interests at their expense".
 
On 1 January 2015, a revised Franchising Code of Conduct came into effect which introduced significant financial penalties and gave the ACCC power to issue infringement notices in respect of breaches of certain provisions of the Code.  Franchise operators are also required to observe new disclosure obligations and have a duty to act in good faith.
 
OUR COMMENT:

There are plenty of sharks out there in the world of franchising and despite all the information around about how careful potential franchisees need to be, there are still lots of examples of franchisors doing the wrong thing and franchisees suffering.  

Many franchisors still just chase the sign-up fee and don't intend or want to provide the ongoing services and support that is the hallmark of successful franchising.

The test of a good franchisor is that they fully and properly comply with all their legal requirements when the relationship first starts.  

If you are either a franchisee or a franchisor and would like help to ensure you are doing what's required under the law to minimise the chance of losing lots of money, contact Townsends Business & Corporate Lawyers on (02) 8296 6222.