Following the 2013 government review of the Franchising Code of
Conduct, the industry in general is waiting to see how proposed
tighter regulations concerning disclosure and increased scrutiny by
the ACCC will affect both franchisors and franchisees.
A case recently heard in the Federal Court considered the
Franchising Code of Conduct's (The Code) protection for
franchisees with regard to misleading and deceptive conduct and the
issue of disclosure.
One of the key findings of the Court in its final judgment
concerned a difficulty in establishing direct loss caused by the
franchisor. So, whilst the outcome of this particular case was in
favour of the franchisor, proposed new legislation from the ACCC
may result in varied outcomes for any future cases.
It's all in the detail...
The case in question involved Pampered Paws Pty Ltd
("Pampered Paws") seeking a franchise agreement with Pets
Paradise Franchising Qld (PPQ).
In the course of conducting business, Pampered Paws became aware
that they were to receive stock almost exclusively from a third
party company connected to PPQ, that many products stocked in their
store were absent of the Pet's Paradise' logo, and that the
IT system in place was not as described in the agreement.
Further, Pampered Paws submitted that PPQ did not disclose all
relevant information and documentation that would need to be signed
in order to be granted a franchise. On account of this, Pampered
Paws brought three major claims;
the express and implied statements were made by PPQ, in breach
of s52 of the Trade Practices Act 1974 (Cth)
("TPA") as was then in force;
that the agreement constituted Exclusive Dealing in breach of
s47 of the TPA; and,
That the documentation of the franchise agreement neglected to
disclose information, which is contrary to The Code.
The Federal Court rejected most of the claims, and of those that
were made out no damages were granted. The court found that
subsequent disclosure of information and opportunities for
inspection of documents resulted in no direct cause of loss to
Pampered Paws, even though some claims were in breach of The
In spite of the final outcome, it is critical that this case
does not bring a false sense of security for franchisors. The 2013
official review of the Franchising Code of Conduct has resulted in
the government being eager to implement harsher penalties in line
with the ACCC's strict new auditing campaign. Contrary to the
case discussed above, in the future, if a franchisor
is found guilty of non-disclosure under proposed
amendments to The Code, the review suggests penalties of a maximum
of $50 000!
What should you do?
The ACCC and the courts are in the process of enacting laws
designed to better police franchising agreements, and the result of
these changes will have a wide-spread effect.
It is important that businesses review documents for each
individual client when franchise agreements are being finalised.
Failure to disclose information which may appear obvious to the
average consumer may still be in breach of the Code.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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On 12th November 2016, new laws will commence to protect small businesses from unfair terms in standard form contracts.
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