Franchisors look out. For the second time in less than 12 months, a franchisor has received a multimillion-dollar penalty for breaches of the Franchising Code. Compliance with the Code is paramount, as GEOWASH P/L recently learnt when it was slugged with a total of $4.2 million in penalties against an insolvent carwash, a car detailing company, and two of its officers Sanam Ali and Charles Cameron.
In the recent case of the Australian Competition and Consumer Commission (ACCC) v Geowash Pty Ltd (No 4)[1], the Federal Court imposed a total of $4.2 million in penalties on the insolvent carwash and detailing company Geowash, and its two officers Sanam Ali and Charles Cameron for breaches of:
- the Franchising Code of Conduct (Franchising Code);
- the Competition and Consumer Act 2010 (CCA); and
- the Australian Consumer Law (ACL).
The penalties included individual penalties of $1.045 million and $656,000 imposed on Ms Ali and Mr Cameron respectively. In addition, Ms Ali and Mr Cameron were ordered to pay $500,000 each as partial redress to franchisees and disqualified from managing a corporation for 5 and 4 years respectively.
These orders followed on from the earlier decision in the ACCC v Geowash Pty Ltd (No 3)[2] (Earlier Decision) in which the Federal Court decided that Geowash, Ms Ali and Mr Cameron (Respondents) were in breach of the Franchising Code, the ACL and the CCA. The latest Geowash case specifically dealt with the assessment of penalties to be imposed on the Respondents.
The Geowash case is particularly noteworthy as it is the second case after the case of the ACCC v Ultra Tune Australia Pty Ltd [3] in which the ACCC brought legal action against a breach of the obligation to act in good faith under the Franchising Code within the same year. Ultra-Tune was ordered to pay a penalty of over $2.6 million.
Good faith obligation under the Franchising Code
Under the Franchising Code, each party to a franchise agreement must act towards another party with good faith, within the meaning of the unwritten law from time to time, in respect of any matter arising under or in relation to the agreement or the Franchising Code.
The good faith obligation cannot be contracted out of by the parties and a breach of the obligation is subject to a maximum civil penalty of $63,000 for each breach.
In assessing whether a party to a franchise agreement has breached the good faith obligation, the court may, among other matters, consider whether the party:
- acted honestly and not arbitrarily; and
- co-operated to achieve the purpose of the agreement.
The Earlier Decision
Broadly speaking, the relevant conduct of the Respondents included:
– unfair dealings with franchisees who entered into franchise agreements including:
(i) engaging in misleading or deceptive conduct in breach of the ACL by misrepresenting to prospective franchisees that they would be charged in accordance with the disclosure document; and (ii) engaging in unconscionable conduct in breach of the ACL by deviating from the terms of the disclosure document in negotiating a purchase price, misrepresenting that the amount charged was solely for fit-out and set-up of a franchise, and misusing the funds to pay commissions to Ms Ali and Mr Cameron as if they were generally available funds to Geowash. In particular, the Federal Court found that the unconscionable conduct also breached the good faith obligation under the Franchising Code.
– misrepresentations on the Geowash website regarding the profitability and affiliations with other businesses in breach of provisions relating to misleading and deceptive conduct under the ACL (Website Misrepresentations), specifically that: (i) the prospective franchisees could make gross revenues of $70,216 in an average 28-day period; (ii) the prospective franchisees could make gross profits of $30,439 in an average 28-day period; and (iii) Geowash had commercial relationship or affiliation with well-known brands including Kia, Nissan, Ikea and Audi among others.
The assessment of penalties
One notable outcome from the Geowash case is that the significant amounts of penalties imposed on the individual officers.
In the Earlier Decision, the court held that Ms Ali and Mr Cameron both had the knowledge in the misrepresentations that they were making (except in Mr Cameron’s case, the court found that he was found not to be an accessory to the Website Misrepresentations).
In justifying the individual penalties, the court stated:
Ms Ali is the embodiment of the corporation as its sole director and was the main instigator of the conduct, the main actor in the conduct and a major beneficiary of the conduct… In the case of Mr Cameron, he was a substantial beneficiary of the conduct. The commissions paid to him (or to the family trust) represented a substantial part of the monies received by Geowash… [which] was used as a vehicle by which Ms Ali and Mr Cameron appropriated monies that ought to have been expended by Geowash on fit-out and set-up of franchises[4]
In addition, the court rejected the Respondents’ argument that the Unfair Dealings conduct was caused by one system of underlying conduct that contravened two penalty regimes (i.e. the ACL and the Franchising Code) and therefore the dealings with franchisees should be assessed as a single course of conduct where the applicable maximum penalty is for a single contravention. Instead, the court held that there were separate contraventions of the prohibition on unconscionable conduct and the good faith obligation in each of the dealings.
Key Takeaways
- As the Australian Competition and Consumer Commission’s ten compliance and enforcement priorities in 2020 include the protection of small businesses under the CCA with a focus on the Franchising Code, it is likely that there will be increased enforcement activities in relation to the good faith obligation and the Franchising Code in general.
- From the two cases, the good faith obligation requires, among others: (i) the parties to act honestly and with fidelity to the bargain concluded between the parties; (ii) a party to consider the legitimate interests of the other party although there is no requirement for the party to subordinate its legitimate interests; and (iii) not to engage in conduct that is dishonest, capricious, arbitrary or motivated by bad faith or a purpose which is antithetical to the franchise agreement or the Franchising Code.
- Franchisors’ conduct must not deviate from the content of disclosure documents without the franchisees’ knowledge and consent.
- Franchisors should establish and maintain procedures, policies and programs (and associated training and monitoring) to ensure that all representatives comply with the applicable laws including the Franchising.
[1] [2020] FCA 23.
[2] [2019] FCA 72.
[3] [2019] FCA 12.
[4] [2020] FCA 23 [145]-[147].