The focus on bargaining power and unfair business tactics continues.

In the wake of the high profile action by the ACCC against one of Australia’s biggest supermarket chains for unconscionable conduct in its treatment of some 200 suppliers, and the headline grabbing $10 million penalty, a $500K penalty against a professional cleaning franchisor in its dealings with two prospective franchisees, seems to pale in comparison and has slipped under the radar. 

However the ACCC’s successful action against South East Melbourne Cleaning Pty Ltd (SEMC) is an equally important case that is creating a body of court guidance on the boundaries of acceptable conduct in B2B settings, particularly where this could cross the line into a breach of the statutory unconscionable conduct prohibition. It also signifies the ACCC’s willingness to take action in franchise matters, consistent with one of its 2015 priorities of ensuring compliance with the new Franchising Code of Conduct (see our outline here). 

The court held that SEMC had contravened provisions of the ACL, including the prohibition on unconscionable conduct and on false or misleading representations. In particular, that SEMC made false or misleading representations concerning the profitability, risk and other key aspects of the proposed franchise and engaged in unconscionable conduct in failing to pay money owing to one of the franchisees for work done, while continuing to charge a franchising fee.  The Court also found contraventions of the new Franchising Code in relation to presentations that SEMC had made to two prospective franchisees about projected earnings information that was not based on reasonable grounds along with a failure to comply with certain requirements of the Franchising Code such as disclosures.

In relation to the unconscionable conduct finding, the court took into account the fact that the franchisees were in a significantly weaker bargaining position than the franchisor, that SEMC was an experienced franchisor, and that SEMC was aware that the franchisees had not obtained independent advice as required under the Franchising Code, in reaching the view that the unconscionable conduct and Franchising Code had been contravened.  The court considered, that due to the exploitative and serious nature of the conduct, the circumstances of the contraventions and the harm caused to the franchisors, that a significant penalty was warranted.  

These cases also pave the way for private actions, with the first unconscionable conduct proceedings now filed by two canned food suppliers, Cofco and Fasttrack Logistics, who are accusing Metcash of unconscionable conduct to force them to hand over more than $11 million in rebates and payments over the last six years. 

The pair also accuse Metcash of failing to take delivery of about $1.5 million of groceries. We recommend food businesses follow this case closely given the implications for both small and large players as to what ‘industry norm’ practices may amount to a breach of the law and for more guidance on where the line between hard bargaining and illegal conduct is crossed.