Misleading and deceptive conduct – Franchisor’s liability

If you are a franchisor, you need to be aware that if you fail to comply with your obligations under schedule 2 of the Competition and Consumer Act (Cth) 2010 – Australian Consumer Law ( ACL ) , you may be found liable to pay a pecuniary penalty.

In March 2015 the Federal Court of Australia found that a franchisor had breached its obligations under the ACL and was ordered to pay a pecuniary penalty in the amount of $500,000. This high amount was ordered to be paid by the franchisor even in light of both of the franchisee’s damages claims being less than $20,000.

The Australian Competition and Consumer Commission ( ACCC ) commenced action against South East Melbourne Cleaning Pty Ltd alleging that it had breached its obligations under:

1. section 18 of the ACL for engaging in misleading and deceptive conduct;

2. section 37(2) of the ACL for making misleading statements in relation to business activities; and

3. section 21 of the ACL for engaging in unconscionable conduct.

The ACCC alleged that:

1. the franchisor had used its stronger bargaining power to gain an illegitimate business advantage over two franchisees by making various representations about the profitability of the franchise;

2. the franchisees had both relied on the representations and entered into the respective franchise agreements; and

3. the reliance by the franchisees resulted in them both suffering losses.

The Court found that the franchisor’s conduct was misleading and deceptive and was in breach of both sections 18 and 37(2) of the ACL. This on the basis that the franchisor had no reasonable basis for making the promises to the franchisees and there was no contractual term in the Franchise Agreements to support the promise.

In addition the Court found that the conduct the franchisor had engaged in during the negotiations was unconscionable. The franchisor had failed to act in good faith during the negotiations with the franchisees and had a disregard for their rights.

To ensure that you are complying with your obligations under the ACL when negotiating with a franchisee make sure that you are acting fairly, not in any way misleading the franchisee and are not taking improper advantage of their weaker position.