Following the 2013 government review of the Franchising Code of Conduct, the industry in general is waiting to see how proposed tighter regulations concerning disclosure and increased scrutiny by the ACCC will affect both franchisors and franchisees.

A case recently heard in the Federal Court considered the Franchising Code of Conduct’s (The Code) protection for franchisees with regard to misleading and deceptive conduct and the issue of disclosure.

One of the key findings of the Court in its final judgment concerned a difficulty in establishing direct loss caused by the franchisor. So, whilst the outcome of this particular case was in favour of the franchisor, proposed new legislation from the ACCC may result in varied outcomes for any future cases.

It's all in the detail...

The case in question involved Pampered Paws Pty Ltd ("Pampered Paws") seeking a franchise agreement with Pets Paradise Franchising Qld (PPQ).

In the course of conducting business, Pampered Paws became aware that they were to receive stock almost exclusively from a third party company connected to PPQ, that many products stocked in their store were absent of the Pet’s Paradise’ logo, and that the IT system in place was not as described in the agreement.

Further, Pampered Paws submitted that PPQ did not disclose all relevant information and documentation that would need to be signed in order to be granted a franchise. On account of this, Pampered Paws brought three major claims;

  1. the express and implied statements were made by PPQ, in breach of s52 of the Trade Practices Act 1974 (Cth) ("TPA") as was then in force;
  2. that the agreement constituted Exclusive Dealing in breach of s47 of the TPA; and,
  3. That the documentation of the franchise agreement neglected to disclose information, which is contrary to The Code.

The Federal Court rejected most of the claims, and of those that were made out no damages were granted. The court found that subsequent disclosure of information and opportunities for inspection of documents resulted in no direct cause of loss to Pampered Paws, even though some claims were in breach of The Code.

In spite of the final outcome, it is critical that this case does not bring a false sense of security for franchisors. The 2013 official review of the Franchising Code of Conduct has resulted in the government being eager to implement harsher penalties in line with the ACCC’s strict new auditing campaign. Contrary to the case discussed above, in the future, if a franchisor is found guilty of non-disclosure under proposed amendments to The Code, the review suggests penalties of a maximum of $50 000!

What should you do? 

The ACCC and the courts are in the process of enacting laws designed to better police franchising agreements, and the result of these changes will have a wide-spread effect.

It is important that businesses review documents for each individual client when franchise agreements are being finalised. Failure to disclose information which may appear obvious to the average consumer may still be in breach of the Code.