Scotty's Premium Pet Foods (Scotty's) in Queensland is the latest scalp in the ACCC's war against franchisors who breach the Franchising Code of Conduct (Code) and the Trade Practices Act 1974 (Cth) (TPA). This case sends a clear warning to franchisors to exercise caution in drafting and serving breach notices on franchisees.
Scotty's distributes pet food to wholesalers and retailers, and licenses franchisees to supply Scotty's pet food products to retailers and home-delivery customers. The franchisees are granted exclusive territories in Queensland and New South Wales.
Scotty's issued several franchisees with notices of breach of their franchise agreements. The franchisees were given 14 days to remedy the alleged breaches, failing which Scotty's threatened to terminate the franchise agreements.
Several of the franchisees complained to the ACCC about the notices they received. The ACCC found that the breach notices did not provide the franchisees with sufficient:
- details of the alleged breaches
- details of what was required to rectify the breaches, or
- time to rectify the breaches.
The ACCC also expressed concern about Scotty's conduct in attempting to supply product directly to a franchisee's existing business customer, within the franchisee's exclusive territory, without reasonable cause.
The ACCC thought that Scotty's actions may have amounted to a breach of section 51AC of the TPA which prohibits corporations from engaging in unconscionable conduct.
Not only did Scotty's withdraw the breaches notice; it also agreed to provide court-enforceable undertakings, to the effect that for the next 12 months it would refrain from issuing any breach notice to any franchisee unless the notice:
- complies with the Code
- provides sufficient particularity of any alleged breach together with steps required to remedy it
- allows the franchisee at least 30 days to remedy the alleged breach, and
- is first certified by a solicitor that it complies with the Code and the franchisor has a reasonable basis for issuing it.
Scotty's also gave an undertaking that it would not approach customers of an existing franchisee to directly supply them with Scotty's product within the exclusive territory of the franchisee, unless certain conditions applied.
Following the undertakings, the Chairman of the ACCC, Mr Graham Samuel said that 'the ACCC will continue to take action to promote compliance on the part of franchisors, particularly given the growth of this sector over the past few years'.
Lessons for franchisors
Drafting notices of breach
Franchisors need to be particularly careful in drafting notices of breach against franchisees. The Code sets out the requirements for a breach notice, which specify that it must identify:
- the alleged breach
- what the franchisee must do to remedy the breach, and
- the consequences for the franchisee if the breach specified in the notice is not remedied.
This information must be provided with sufficient particularity by reference to the franchise agreement, to enable the franchisee to respond to the breach notice.
Time to remedy breaches
Franchisors should also consider how much time to specify in the notice for the franchisee to remedy the breach. Section 21(3) of the Code, states '… the franchisor does not have to allow more than 30 days' for the franchisee to rectify the breach. There has been some debate about whether this requirement means that the breach notice must specify that the franchisee has at least 30 days to rectify the breach or whether less time can be given.
The undertakings sought and provided by the ACCC in the Scotty's case suggest that 30 days notice or more must be given.
However, on a strict reading of the Code it would appear that a franchisor does not have to give the franchisee more that 30 days notice but it can give less than 30 days notice.
Clearly there are circumstances where the franchisee's breach is so serious that it justifies giving the franchisee less than 30 days notice, for example a serious infringement of the franchisor's intellectual property rights which has a detrimental impact on the whole franchise network.
On the other hand, in some cases 30 days notice to rectify a breach is unreasonable. Consider, for example, a situation where a franchisee is required under the franchise agreement to obtain quarterly sales targets but fails to do so. It would be unreasonable for the franchisor to issue a breach notice requiring the franchise to achieve future sales targets within 14 or even 30 days. In this instance, notwithstanding what the Code says, the franchisor would be prudent to specify a three month rectification period.
Reference to the franchise agreement
Before franchisors issue breach notices, they should look closely at the alleged infringing conduct by reference to the terms of the franchise agreement and ensure they are particularly careful in drafting notices of breach to franchisees.
Franchisors must also consider what would be a reasonable period of time for the franchisee to rectify the breach, and this will obviously depend on the nature and seriousness of the breach, and the required rectification in each case.
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.