Federal Court declares cleaning franchisor engaged in unconscionable conduct
The Federal Court has declared that South East Melbourne Cleaning Pty Ltd (in liquidation) (formerly Coverall Cleaning Concepts South East Melbourne Pty Ltd) (Coverall Melbourne) engaged in unconscionable conduct in contravention of the Australian Consumer Law following action by the Australian Competition and Consumer Commission.
Coverall Melbourne was the Victorian franchisor of a national franchise system that establishes and operates professional cleaning services.
The Court also declared that Coverall Melbourne engaged in misleading conduct, made false or misleading representations and contravened the Franchising Code of Conduct when it signed up two individuals to the cleaning franchise.
In its initial dealings with the two franchisees, Coverall Melbourne made statements and provided a “Coverall Australasia Franchise Plan” document which represented that a particular investment by each of the franchisees would result in them earning specified monthly amounts. The Court declared that Coverall Melbourne did not have a reasonable basis for making these representations.
Coverall Melbourne also failed to pay the two franchisees for the cleaning services they had provided, in breach of the terms of Coverall Melbourne’s franchise agreement.
“Businesses that provide earnings information to franchisees must ensure they have a reasonable basis for making any earnings representations,” ACCC Deputy Chair Dr Michael Schaper said.
“The ACCC considered that Coverall Melbourne’s conduct was particularly egregious because, following its misleading behaviour when signing up these franchisees, Coverall Melbourne then failed to pay them for the work they had done,”
The Court declared that Coverall Melbourne’s failure to pay the amounts owing to the franchisees, while also demanding payment of the initial franchise fee, was in all the circumstances unconscionable, particularly as the franchisees had significantly weaker bargaining power than Coverall Melbourne.
“Unconscionable conduct that impacts consumers or small businesses is an ACCC enforcement priority,” Dr Schaper said.
Additionally, the Court declared that Coverall Melbourne had contravened the Franchising Code by providing earnings information in the Coverall Australasia Franchise Plan document to the two franchisees which was not based on reasonable grounds.
The Court declared that Coverall Melbourne’s franchise agreements with the two franchisees were void from the date of the orders.
The Court also declared, by consent, that Coverall Melbourne’s former director, Brett Jones, was knowingly concerned in Coverall Melbourne’s unconscionable conduct contraventions. The Court ordered by consent that Mr Jones pay a penalty of $30,000 and compensate the two affected franchisees for the franchise fee they had paid and the monies owing for work completed, amounting to slightly over $23,000. Mr Jones was also ordered to pay a contribution to the ACCC’s costs.
The Court also made an order, by consent, disqualifying Mr Jones from managing a corporation for 2 years, and accepted an undertaking from Mr Jones and Coverall Melbourne’s former sales manager, Astrid Haley, that they will not, for a period of 2 years, be directly or indirectly involved in the management and/or marketing of a franchise business.
A hearing in relation to the pecuniary penalty to be imposed on Coverall Melbourne will be held on a date to be fixed by the Court.