Australia: ACCC takes franchisor to the cleaners for unconscionable conduct

Australian Competition and Consumer Commission v South East Melbourne Cleaning Pty Ltd (in liquidation) (formerly known as Coverall Cleaning Concepts South East Melbourne Pty Ltd) [2015] FCA 25.

In a judgment handed down on 29 January 2015, the Federal Court has declared that South East Melbourne Cleaning Pty Ltd (in liquidation) (formerly Coverall Cleaning Concepts South East Melbourne Pty Ltd) (Coverall SEM) engaged in unconscionable conduct in contravention of s 21 of the Australian Consumer Law (ACL). The decision represents a consolidation of the Court's recent clarification of the statutory concept of unconscionable conduct and is a cautionary tale of the importance of compliance with mandatory industry codes.

BACKGROUND

Coverall SEM was the Victorian operator of a cleaning franchise business. The ACCC's claims concerned Coverall SEM's dealings with two first time franchisees who each paid franchise fees to Coverall SEM. In summary, the impugned conduct involved Coverall SEM:

• entering into franchise agreements without disclosing matters required to be disclosed under the Franchising Code of Conduct, which is prescribed as a mandatory industry code for the purposes of Part IVB of the Competition and Consumer Act 2010 (Cth) (CCA);
• representing, without a reasonable basis for doing so, that a particular investment by each of the franchisees would result in them earning specified monthly amounts;
• in breach of the franchise agreement, failing to remit payments to the two franchisees for the cleaning services they had provided, when Coverall SEM had received payments from the customers to whom they had provided those services; and
• unfairly relying on the terms of the franchise agreement to require the franchisees to make payment of various fees and loan repayments and preventing them from terminating the agreements.

The ACCC alleged that this conduct, in all the circumstances, amounted to unconscionable conduct. In addition, the ACCC alleged that by making representations about the earnings the franchisees would receive from the franchise business, Coverall SEM had engaged in misleading conduct in contravention of s 18 of the ACL and made false or misleading representations in contravention of s 37(2) of the ACL and that the alleged contraventions of the Franchising Code of Conduct amounted to a breach of s 51AD of the CCA.

THE COURT'S APPROACH TO THE UNCONSCIONABLE CONDUCT CLAIMS

The Honourable Justice Murphy held that Coverall SEM had engaged in each of the alleged contraventions. In finding that Coverall SEM's conduct towards the two franchisees had amounted to unconscionable conduct, his Honour took the approach to determining claims of unconscionable conduct recently adopted by the Full Court ( see our commentary on ACCC v Lux Distributors Pty Ltdⁱ) and the New South Wales and Victorian Courts of Appeal.ⁱⁱ

His Honour noted that while notions of moral obloquy or moral tainting may be relevant in assessing allegations of unconscionable conduct, the Court's task involves evaluating conduct by reference to a normative standard of conscience which may develop and change over time and which must be understood and applied in the context in which the circumstances of the case arise.ⁱⁱⁱ So, in determining whether Coverall SEM had engaged in unconscionable conduct, it was relevant to consider its misleading conduct towards the franchisees in contravention of the ACL and its contraventions of the Franchising Code of Conduct. His Honour found that these provisions are directed at ensuring prospective franchisees are properly informed as to the financial prospects of a business and point to a normative standard of conscience, and evince a requirement that:^iv

...franchisors must act fairly and without misleading franchisees and prospective franchisees, must make proper disclosure to prospective franchisees, and must not take improper advantage of their weaker position.

Standing back and looking at the entire circumstances of Coverall SEM's conduct towards each of the franchisees, his Honour found that Coverall SEM did not act in good faith towards the franchisees and at every step had sought to take advantage of its significantly stronger bargaining position.

THE NEW FRANCHISING CODE OF CONDUCT

Justice Murphy's judgment provides a useful summary of the principles of law concerning the statutory concept of unconscionable conduct under the ACL.^v It follows the recent approach the Courts have adopted to determining unconscionable conduct cases which measures conduct against a normative standard of conscience without a focus on the existence of moral obloquy or tainting.^vi

As such, the decision is also a timely reminder of the importance of compliance with mandatory industry codes prescribed under the CCA which a Court may have regard to in considering an unconscionable conduct claim and which may evince the prevailing societal norms which will be central to its inquiry.

In particular, the decision underscores the importance of franchisors' compliance with the new Franchising Code of Conduct, which came into force on 1 January 2015. The new Franchising Code of Conduct introduces a number of changes recommended by the Wein Review, including:

• an obligation for the parties to a franchise agreement to act in "good faith" within the meaning of the unwritten law;
• new disclosure requirements directed at improving the information that franchisors must provide to franchisees;
• measures to correct the imbalance in the relationship between franchisee and franchisor which has been identified as being weighted to franchisors; and
• penalties of up to $51,000 per contravention in respect of some requirements.

The unequal relationship between franchisors and franchisees is fertile ground for unconscionable conduct claims and the ACCC has stated that "unconscionable conduct that impacts consumers or small businesses is an ACCC enforcement priority".^vii Following the decision in ACCC v South East Melbourne Cleaning Pty Ltd, franchisors who, like Coverall SEM, contravene the Franchising Code of Conduct may face allegations of unconscionable conduct if they do not clean up their act.

Footnotes

ⁱ[2013] FCAFC 90 (Lux).

ⁱⁱ See Director of Consumer Affairs Victoria v Scully and Another (2013) 303 ALR 168 and PT Ltd Spuds Surf Chatswood Pty Ltd [2013] NSWCA 446.

ⁱⁱⁱ [2015] FCA 25 at [116].

^iv Ibid at [128].

^v Ibid at [116].

^vi See ACCC v Coles Supermarkets Australia Pty Ltd [2014] FCA 1405 at [36] per Gordon J.

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