Franchisor hit with $4.2 million penalty
A recent $4.2 million example stands out as a strong reminder that franchisors must ensure they comply with the Franchising Code of Conduct (the “Code”) and the Australian Consumer Law (“ACL”).
Under the Code, the Australian Competition and Consumer Commission (“ACCC”) can take court action against franchisors and seek a financial penalty for breaches such as failing to act in good faith, failing to provide a disclosure document, failing to attend mediation or failing to provide reasonable written notice of proposed termination for breach. The maximum penalty for a single breach of the Code is $63,000.
In dealings with their franchisees, franchisors should pay very close attention to the ACL which imposes a number of broad obligations (which are not limited to franchising arrangements) including an obligation not to make false and misleading representations, an obligation not to engage in conduct that is misleading or deceptive (or is likely to mislead or deceive) and an obligation not to engage in unconscionable conduct.
The maximum penalty for a breach of the ACL has recently been increased to the greater of $10 million, or three times the value of the benefit obtained, or 10% of annual turnover in the previous 12 months if the value of the benefit cannot be determined.
The penalties payable under the ACL are therefore much greater, and can be imposed in addition to, the penalties under the Code. This was the case when the ACCC pursued Ultra Tune Australia Pty Ltd in 2019 which resulted in penalties of over $2 million being imposed.
In the case of former carwashing and detailing business Geowash Pty Ltd the business and its director and franchising manager were heavily penalised for breaches of the Code and the ACL with the Federal Court ordering $4.2 million in penalties against them. The breaches included:
- making false or misleading representations;
- failing to act in good faith in relation to the sale and marketing of its franchises; and
- acting unconscionably towards its franchisees.
The director and franchising manager were personally liable for substantial penalties as they had knowingly been concerned in the unconscionable conduct engaged in by the company. In addition, they were ordered to pay a further $500,000 each, which was to be used to compensate franchisees affected by their breaches of the Code and the ACL. They were also disqualified from managing corporations for periods of 5 years and 4 years, respectively.
There has never been a better time for franchisors to review both their compliance documentation and their dealings with franchisees to ensure that they are not in breach of either the Code or the ACL.