The Wash-up on the Cleaning Franchise case

Dr Michael Schaper, Deputy Chairman, ACCC

By imposing a $500,000 penalty against a cleaning franchisor, the Federal Court has sent a clear message to the franchise industry about complying with the law.

The Australian Competition and Consumer Commission took court action against Coverall Melbourne* after the franchisor misled two franchisees about the income they would earn and then failed to pay them, whilst at the same time still demanding money from them for franchising fees.

In handing down the penalty against Coverall Melbourne, even though it is in liquidation, Justice Murphy said there is also a strong requirement to deter other franchisors from acting unfairly and unconscionably when providing information to prospective franchisees and those operating a franchise.

The court found Coverall Melbourne made false or misleading statements to two prospective franchisees about the volume of work they would get and the resulting payments they would receive each month. The representations included providing the prospective franchisees with a ‘franchise plan’ that specified monthly earnings. The court declared that Coverall Melbourne breached the Australian Consumer Law (ACL) because it did not have a reasonable basis for making the earnings forecasts.

Buying a franchise is a big step

As such, there is a mandatory Franchising Code of Conduct to help ensure prospective franchisees can make an informed investment. In this case, the court declared that Coverall Melbourne had contravened the Code in two ways. First, it provided false or misleading earnings information, and secondly it failed to notify one of the franchisees about the need to seek independent advice before entering into a franchise agreement.

Coverall Melbourne’s most egregious conduct involved refusing to pay the two franchisees for work completed and continuing to demand payment for franchising fees. Justice Murphy said Coverall Melbourne had deliberately acted without regard to appropriate norms or standards within society. The court found that the franchisees had a significantly weaker bargaining power than the franchisor and ruled that Coverall Melbourne had engaged in unconscionable conduct in breach of the ACL. This is a significant finding.

The court made earlier orders, by consent, against Coverall Melbourne’s former director, Brett Jones, who was found to be knowingly concerned in Coverall’s unconscionable conduct contraventions. The court ordered Mr Jones to pay a penalty of $30,000 and compensate the two franchisees. It is important to note that the $500,000 penalty was only for contraventions of the ACL. There were no financial penalties available for breaching the Franchising Code at the time the offences occurred, but that has now changed.

A revised Code

On 1 January 2015, a revised Code came into effect which allows the ACCC to seek penalties in the court of up to $51,000 for certain breaches of the Code. The new Code also provides the ACCC with the power to issue infringement notices for breaches of certain provisions of the Code. Franchise operators are also required to observe new disclosure obligations and have a duty to act in good faith.

Ensuring compliance

With the new Code ensuring a compliance is a priority for the ACCC. As well as enforcement, the ACCC will continue educational activities to ensure franchisees and franchisors are aware of their rights and obligations under the new Code and the ACL.

*South East Melbourne Cleaning Pty Ltd (in liquidation) (formerly Coverall Cleaning Concepts South East Melbourne Pty Ltd) was the Victorian franchisor of Coverall’s national professional cleaning franchise system.

Dr Michael Schaper is Deputy Chair of the Australian Competition and Consumer Commission.

The Australian Competition and Consumer Commission is an independent Commonwealth statutory authority. The ACCC enforces the Competition and Consumer Act 2010, which includes the mandatory Franchising Code of Conduct. For the latest small business and franchising news and events you can now follow the ACCC on LinkedIn.

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