NEW CASE ON FRANCHISING AND DIRECTORS DUTIES: SOMETIMES IT MAY
BE TOO GOOD TO BE TRUE
Part of selling any business is to talk about its good points,
how much income it makes and the benefits to any potential
purchaser. The problem comes when those benefits are oversold. With
selling a business as part of a franchise it is the same.
Under the new Franchising Code of Conduct, which commenced in
January 2015, Franchisors have new disclosure obligations and a
duty to act in good faith when dealing with Franchisees and
prospective Franchisees. In 2015, the ACCC is making it a priority
to crack down on breaches of the Franchising Code.
In a recent case in the Federal Court, in proceedings brought by
the ACCC, the Court found that South East Melbourne Cleaning Pty
Ltd (in liquidation) (formerly Coverall Cleaning Concepts South
East Melbourne Pty Ltd) as Franchisor had contravened both the
Australian Consumer Law, and the Franchising Code of Conduct. The
Court found that the Franchisor had engaged in misleading and
deceptive conduct, including overstating what potential income two
potential Franchisees might earn if they bought a Franchise from
the Company. They also misrepresented the systems the Franchisor
had in place under the Franchise to both collect payments from
customers and to pay Franchisees on time. In addition, they failed
to inform one of the Franchisees to obtain independent legal
The Court ordered a penalty of $500,000 against the Franchisor.
The Court also made orders against the Directors personally. One
was required to pay a $30,000 penalty, and the other was
disqualified from managing a corporation for two years. The Court
found that the director had used "unfair tactics in his
dealings" with the Franchisees.
The case serves as a warning both to Franchisors, their
Directors, and to potential Franchisees. For Franchisors, it is
essential that you comply with the Franchising Code of Conduct in
all dealings with your Franchisees and Potential Franchisees. For
Directors, it is evident that the Court is quite happy to order
penalties against a Director individually, even where there is a
company structure in place, if the Director is aware of, or is
engaging in conduct that is in breach of the Franchising Code. For
potential Franchisees, the warning is to carefully research any
potential Franchise purchase, including obtaining independent legal
and financial advice, as sometimes, what is being sold really is
too good to be true.
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.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
On 12th November 2016, new laws will commence to protect small businesses from unfair terms in standard form contracts.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).