Directors of Franchisors and Franchisees beware of not over selling the business.

It is human nature to often exaggerate to others about the good things about our businesses, our families, including the prospects of our footy team winning the competition.

However it is improper at law to exaggerate the attributes of a business to a prospective purchaser. This obligation is reinforced by the provisions of the new Franchising Code of Conduct, which commenced in January 2015.

In a recent decision of the Federal Court detailed below the Judge concluded:

The company “gave scant regard to the requirement that franchisees should be fully informed and given the opportunity to be independently advised before committing to the purchase of a franchise business”.

The director’s conduct “reflected a lack of understanding of the proper role of a company director in relation to the legal obligation owed by a franchisor to its franchisees.”  And that the director “employed unfair tactics in his dealings [with franchisees] to preserve Coverall’s interests at their expense”.

The Australian Competition and Consumer Commission has recently reported that:

“The Federal Court has ordered a $500,000 penalty against South East Melbourne Cleaning Pty Ltd (in liquidation) (formerly Coverall Cleaning Concepts South East Melbourne Pty Ltd) (Coverall Melbourne) for contraventions of the Australian Consumer Law (ACL), in proceedings brought by the Australian Competition and Consumer Commission.

Coverall Melbourne was the Victorian franchisor of a national professional cleaning franchise system.

In October 2014, the Court declared that Coverall Melbourne had engaged in unconscionable conduct, made false or misleading representations, and had contravened the Franchising Code of Conduct in its dealings with two individuals who were prospective franchisees and subsequently signed up to the cleaning franchise.

The Court found that Coverall Melbourne had made false or misleading representations concerning the income that the two prospective franchisees would earn. The Court also found that Coverall Melbourne had contravened the Franchising Code by providing this false or misleading information to the two individuals and by failing to notify one of the franchisees of the need to seek independent advice before entering into the franchise agreement.

Additionally, by failing to pay the franchisees for the work they had completed and continuing to demand payment for the initial franchising fee, the Court found that Coverall Melbourne had engaged in unconscionable conduct.

“This significant penalty decision is important for all involved in the franchise industry.  By imposing a penalty of $500,000, the Court is seeking to deter other franchisors from engaging in similar conduct. This is a clear message that franchise businesses must ensure they comply with their obligations under the Australian Consumer Law and Franchising Code of Conduct,” ACCC Deputy Chair Dr Michael Schaper said.

Justice Murphy had found that Coverall Melbourne “did not have in place a business system capable of collecting payment and actually paying its franchisees on time…nor did it have a willingness to implement such a system and to pay franchisees in accordance with their entitlements.”

In relation to Coverall Melbourne’s contraventions of the Franchise Code of Conduct, His Honour noted that Coverall Melbourne “gave scant regard to the requirement that franchisees should be fully informed and given the opportunity to be independently advised before committing to the purchase of a franchise business”.

Orders were previously made against Coverall Melbourne’s former director, Brett Jones, including a $30,000 penalty and an order disqualifying Mr Jones from managing a corporation for 2 years.

His Honour considered Mr Jones’ conduct to have “reflected a lack of understanding of the proper role of a company director in relation to the legal obligation owed by a franchisor to its franchisees.” His Honour also noted that Mr Jones “employed unfair tactics in his dealings [with franchisees] to preserve Coverall’s interests at their expense”.

On 1 January 2015, a revised Franchising Code of Conduct came into effect which introduced significant financial penalties and gave the ACCC power to issue infringement notices in respect of breaches of certain provisions of the Code. Franchise operators are also required to observe new disclosure obligations and have a duty to act in good faith.

Ensuring compliance with the new Franchising Code of Conduct is a priority for the ACCC under its 2015 Compliance and Enforcement Policy.