Recent judgments against the Geowash and the Funk Coffee & Food franchisors serve as timely reminders of the risks for franchisors in providing financial information to franchisees or making statements or representations which are not consistent with the disclosure document or franchise agreement.
They also demonstrate the focus on good faith dealings between franchisors and franchisees and the significant penalties and damages that can be imposed.
The facts of the cases (below) are interesting and provide examples of the sorts of behaviour that might land a franchisor in Court. More importantly, however, there are some key practical take away points from the cases that affect both franchisors and franchisees. These are set out at the end of this article.
Geowash
Geowash is a car wash and detailing franchise. The ACCC launched proceedings against the franchisor for publishing statements on its website as to the turnover and profit that a franchisee may make, which was based on very limited data ('the Income Representations'), and indicating that the franchisor had contracts with other car retailers which were in fact not true ('the Affiliation Representations').
Claims were also brought against the franchisor's director, Ms Sanam Ali, and the company's National Franchising Manager, Mr Charles Cameron, in addition to the franchisor because Ms Ali and Mr Cameron set initial franchise fees based on how much a franchisee could afford instead of the actual costs to set up the car wash site and related up-front costs. Also, from the initial franchise fee received, a significant proportion was paid as a sales commission to Mr Cameron and as other fees to the franchisor. This would sometimes leave insufficient funds for the actual fit-out of the carwash site.
The franchisor was held to have engaged in misleading and deceptive conduct, which is prohibited under the Australian Consumer Law, by making the Income Representations with no reasonable basis to support the figures used, and by making the Affiliation Representations when they were untrue.
Further, the franchisor, and Ms Ali and Mr Cameron personally, were held to have engaged in misleading and deceptive conduct, unconscionable conduct (which is also prohibited under the Australian Consumer Law), and to have breached their obligations to act in good faith towards franchisees as set out in the Franchising Code, due to their unfair dealings in relation to the initial franchise fees.
Significant penalties were imposed against all parties. In particular, Ms Ali received a penalty in excess of $1 million and Mr Cameron received a penalty of $656,000. They each had to pay an additional $500,000 to a fund to redress the franchisees' losses. Ms Ali and Mr Cameron were also disqualified from managing a corporation for five years and four years respectively.
Funk Coffee & Food
Funk Coffee & Food is a franchise cafe chain operating in South Australia. In 2009 it negotiated the sale of one of its company stores at Flinders Street. As part of the negotiations, Mr Damascos, a director for the franchisor, made representations that the business would earn $15,000 per week in turnover ('the Financial Representations'), which was based on the turnover for only one particular month. This figure also was not updated later when the franchisor was aware of certain changes which impacted the business.
The franchisor and Mr Damascos were held to have engaged in misleading and deceptive conduct by making the Financial Representations with no reasonable basis to support the Financial Representations, and failing to update the franchisee of the changes which they were aware of.
They were also held to have breached the Franchising Code by failing to include in the Disclosure Document the Financial Representations and other required information such as an explanation of the choice of the period covered by the financial projection.
Courts have a broad discretion as to remedies under the Australian Consumer Law. The Funk franchisee was awarded damages of approximately $370,000. Further, the franchise agreement and its renewal were declared unenforceable and so the franchisee did not have to pay any outstanding franchise fees or licence fees on account of rent to the franchisor.
Mr Damascos announced in January this year that he intends to appeal the decision.
Key points
The following key points can be taken away from the Geowash and Funk cases:
If you are a franchisor:
The ACCC is seeking larger penalties against franchisors, their directors and senior managers. Franchisors should review their current practices when recruiting franchisees to ensure there are always fair dealings between the franchisor and prospective franchisee.
Franchisors must be mindful and instruct their representatives that oral conversations and informal communications can be relied upon in a claim for misleading conduct notwithstanding any exclusion clauses in the franchise agreement. Franchisors should take detailed notes of any meetings held with prospective franchisees.
When making representations to franchisees, particularly about financial projections, there must be evidence of a reasonable fact or circumstance existing at the time to support the representation.
Franchisors should consider using thorough and well drafted 'prior representation statements'. However, if the franchisee writes down any representation in that document, the franchisor must review the representation and correct it if necessary.
Franchisors should review their websites and marketing material to ensure they are consistent with their disclosure documents and franchise agreements.
Franchisors should require the franchisee to obtain accounting and legal advice on any projections or financial information provided, not just the contracts.
If you are a franchisee:
Franchisees should be aware of their rights and seek legal, financial and accounting advice before entering into a franchise agreement.
Franchisees should review the Disclosure Document carefully and also consider whether there are any additional facts, statements or representations which are not included and which they are relying on.
This article provides general comments only and does not constitute legal advice. You should always seek specific advice on your particular circumstances.
CCK Lawyers has extensive experience with franchising. If you need advice contact us on (08) 8211 7955.