Court confirms pattern of conduct by Franchisor unconscionable, misleading and deceptive

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March 2019

The Federal Court of Australia confirms that a pattern of conduct by a car wash Franchisor (Geowash)  was unconscionable, misleading and deceptive, and in breach of an obligation to act in good faith

Key Takeaways

  • A Court may determine a franchisor has engaged in unconscionable conduct or did not act in good faith towards a franchisee based on a pattern of behaviour;
  • A court may determine a franchisor engaged in misleading or deceptive conduct based on a pattern of behaviour;
  • Representations made to franchisees by a franchisor’s company website about expected revenue, profits and commercial affiliations may constitute misleading or deceptive conduct;
  • A franchisor who creates an overall impression to charge a franchisee in a particular way and conversely charges its franchisees in a different manner, will constitute unconscionable conduct;
  • The making of representations by a franchisor is misleading or likely to mislead or deceive if it has a tendency to lead into error;
  • Franchisors must abide by the norms embodied in commercial law, including being fair, honest and open.

Overview of Australian Competition and Consumer Commission v Geowash Pty Ltd (Subject to a Deed of Company Arrangement) (No 3) [2019] FCA 72

On 8 February 2019, his Honour Justice Colvin handed down judgment on a case advanced by the Australian Competition and Consumer Commission (ACCC) against Geowash Pty Ltd (Geowash).  A number of aspects of dealings with franchisees had been alleged by the ACCC to be part of a pattern of behaviour, requiring his Honour to make a general claim that the conduct alleged by the ACCC, was unconscionable or in breach of the good faith obligation under the Franchising Code of Conduct (Code).

From 2013 until 2016, Geowash offered carwash franchises to parties in Australia.  The franchises were for hand car wash and detailing businesses conducted in café areas and/or car parks near shopping areas.  There were 18 Geowash franchises who commenced trading in Australia.

The standard Geowash franchise agreement provided that the franchisee:

  1. Was responsible for the payment of the costs of fit-out; and
  2. Had to purchase their equipment from Geowash.

The standard Geowash franchise agreement also provided that the franchisee was liable for:

  1. Establishment fees;
  2. Documentation fees;
  3. Site selection costs and expenses; and
  4. Initial training fees.

The ACCC alleged:

  1. In the course of marketing franchises on its website, Geowash made representations to prospective franchisees that they could make average revenues of $70,216.00 and estimated gross profits of $30,439.00 in an average 28 day period;
  2. In the course of marketing franchisees on its website, Geowash represented that it had a commercial relationship or affiliation with each of Nissan, Kia, Renault, Audi, Emirates, Shell, Hertz, Holden, Ikea and Thrifty; and
  3. As to the costs and expenses of establishing an operating franchise site, Geowash represented to prospective franchisees that it would charge franchisees in accordance with the terms of a standard form franchise agreement and a disclosure document.

The ACCC prosecuted Geowash, alleging numerous breaches of the Australian Consumer Law (ACL) and the Code, in particular:

  1. A company, its sole director and its national franchising manager engaged in misleading or deceptive conduct in contravention of s 18 of the ACL:
    • Where representations made on a company website to prospective franchisees about expected revenue and profit;
    • Where representations made on a company website that the company has a commercial affiliation with several brands;
    • Where representations on a website were false;
    • Where dealings as to charges to be made to franchisees created the overall impression that the franchisor intended to charge in a particular way; and
    • Where the overall impression was false and misleading as to the franchisor’s intentions as to the way it would charge.
  2. Geowash had engaged in unconscionable conduct in contravention of s 21 of the ACL by its charging practices:
    • Where francisees were charged in staged payments and told these payments would be applied for the set-up and fit-out of their franchise;
    • Where the payments were instead applied to meet the expenses of the company generally and pay commissions to staff; and
    • Where the payments were not applied to the set-up and fit-out of the franchise.
  3. Geowash did not act in good faith towards franchisees in contravention of cl 6 of the Code:
    • Where the company’s charging practices did not accord with the terms of the franchise agreements entered into.

In its totality, the ACCC alleged Geowash had made representations to prospective franchisees that were not true and to the extent that they concerned future matters, were made without reasonable grounds.  Many of the representations alleged, had been made by Geowash publishing material on its website about average monthly earnings and Geowash’s commercial affiliations.  Additional concerns were raised with regards to the manner in which Geowash would charge it’s franchisees for the costs of establishing a franchise at a particular site.

Geowash told Franchises they would charge them fees on a certain basis but ended up invoicing fees on a different basis

ACCC additionally alleged Geowash had engaged in unconscionable conduct or in breach of the duty to act in good faith in dealing with franchisees.  The franchisees were told by Geowash they could acquire a franchise within a certain budget, however, the franchisees were later invoiced lump sum amounts outside the prior agreement between the franchisee and Geowash.  Geowash’s sole director and national franchising manager argued, unsuccessfully, these amounts were applied to pay for their commissions and to meet the general operating costs of Geowash, rather than to meet the costs of establishing the franchises.

It was found the intention of Geowash, by way of its sole director and national franchising manager, was to charge by reference to what each franchisee was willing to pay and then use the money to pay their commissions and meet the general operating costs and expenses of Geowash (being costs including, but not confined to, the fit-out and set-up of each outlet).

The manner in which Geowash said it would charge its franchisees in the Disclosure Document and the manner in which it did charge its franchisees (being respectively matters arising under the Code and the agreement) involved a failure to act in good faith.

The Court’s Decision

His Honour Justice Colvin concluded Geowash had:

  1. Engaged in false, misleading or deceptive conduct;
  2. Engaged in unconscionable conduct as to its charging practices; and
  3. Breached clause 6(1) of the Code by failing to act towards four of its franchisees in good faith concerning its charging practices.

In an interesting judgment, his Honour stated he had found that Ms Ali, being the sole director of Geowash, “was not a witness of truth and her evidence was characterised by lies, exaggeration and misrepresentation”.

Implication of the Decision

The case advanced by the ACCC against Geowash endorsed numerous High Court cases pertaining to misleading or deceptive conduct of companies, and individuals, in making representations to the public and representations made in the course of dealings with particular parties.  His Honour Justice Colvin concluded, in alignment with the High Court precedents, the conduct of companies, and individuals, in making representations is misleading or likely to mislead or deceive if it has a tendency to lead into error.

As to whether conduct has a tendency to lead into error, the decision affirmed a Court will objectively consider whether the characteristics of a reasonable member of the class of persons to whom the conduct is in fact directed (irrespective of the intentions of the party engaging in the conduct), as to who may comprise the audience.

His Honour also stated, in accordance with High Court cases, that persons of good business conscience are expected to abide by the norms embodied in commercial law.  In a modern business setting they are expected to be fair, honest and open.  The business community does not condone sharp practice, a lack of frankness, reliance on technicality, abuse of trust, exploration of an imbalance in commercial or financial power or tactical steps designed to overbear as a means to secure agreement.

The decision, however, errs in addressing the infamous High Court’s open question as to whether there is a general obligation to act in good faith in the performance of contracts and whether contractual powers and discretions are limited by requirements of good faith and rationality analogous to those applicable in the sphere of public law.

Craig Higginbotham and Harrison Dobb

15 March 2019

By | 2019-03-15T10:30:11+11:00 March 15th, 2019|Business, Consumer Law, Contract Law, Retail|Comments Off on Court confirms pattern of conduct by Franchisor unconscionable, misleading and deceptive