The Federal Court has again reminded us that the law will step in to defend franchisees who have suffered at the hands of overzealous franchisors. The Court recently found that an experienced franchisor, South East Melbourne Cleaning (South East) engaged in unconscionable conduct in its dealings with franchisees and contravened section 21 of the Australian Consumer Law.

South East was the Victorian franchisor of a national franchise system that established and operated professional cleaning services. In its negotiations and dealings with two franchisees, South East:

• made statements and provided documents which represented that a particular investment by each franchisee would yield a particular monthly return. South East did not have a reasonable basis for making those representations;
• breached the franchise agreement by refusing to pay the franchisees for the cleaning services they had provided to customers when South East had received payments from those customers; and
• unfairly relied on the terms of the franchise agreement to require the franchisees to make payment of various fees, loan repayments and preventing them from terminating the franchise agreements.

The court found that South East did not act in good faith towards the franchisees and at every step sought to take advantage of its significantly stronger bargaining position. His Honour Justice Murphy said:

“…franchisors must act fairly and without misleading franchisees and prospective franchisees, must make proper disclosure to prospective franchisees, and must not take improper advantage of their weaker position.”

Orders

The Court ordered the franchise agreements be made void and that South East’s former director (who was knowingly a party to the unconscionable conduct) be disqualified from managing a corporation for two years and pay a penalty of $30,000. The former director was also required to pay compensation to the franchisees of an amount that represented the loss and damage they had suffered totaling $23,317.

Lessons

A franchisor should be sensitive to the relative strength of their bargaining position when dealing with franchisees (particularly those who are inexperienced!). This power imbalance may draw scrutiny from the courts and means that franchisors should be at pains to ensure:

• that representations are reasonably made, preferably with some sort of verifiable evidence backing up those claims;
• they conduct themselves in a manner that is fair and transparent and do not take advantage of a franchisee’s ignorance to the law or their rights under the franchise agreement; and
• that if a dispute arises with a franchisee, the franchisor should not misrepresent the rights and obligations of the parties under the franchise agreement.