Thursday, 12 April 2018

Franchisor Breach of Franchising Code of Conduct - Failure to properly Disclose (ACCC v Morild Pty Ltd)

Disclosure, Transparent
The ACCC were successful in the Federal Court in November 2017: (ACCC v Morild Pty Ltd [2017] FCA 1308), against both the Franchisor company and its director.

The Franchising Code of Conduct ("the Code") prescribes that certain information must be disclosed in a Disclosure Document and given by the Franchisor to its prospective Franchisees 14-days before a Franchisee enters into a Franchise Agreement.

Elements of the information to be disclosed include, among others:
  • financial details of the Franchisor;
  • operating costs and fees;
  • contact details of existing and previous Franchisees;
  • the business experience for the past 10 years of each officer of the Franchisor;
  • whether there is an exclusive territory; 
  • conditions for renewal; and 
  • default and termination details. 
The Court held that not only did the Franchisor (Morild Pty Ltd) fail to create a compliant Disclosure Document but the director also knowingly failed to disclose his previous directorship of an insolvent Pastacup franchisor and his relevant business experience.

As a result, Morild Pty Ltd was fined $100,000 for its breach of the Code and the director personally fined $50,000 for being knowingly concerned in the breach.

In addition to the penalties, Morild Pty Ltd was also required to give certain declarations, injunctions were imposed and Morild Pty Ltd was ordered to contribute towards the ACCC's legal costs.

The Code requires Franchisors to provide prospective Franchisees with a Disclosure Document which contains important information about the Franchise System, the Franchise Business and the Franchisor. Full and accurate disclosure by the Franchisor is essential to enable prospective Franchisees to make informed business decisions.

This case shows:
  • for Franchisors - it is important they are transparent and disclose all relevant information to their proposed Franchisees - a failure to do this exposes the Franchisor and any directors to penalties and other legal action, as well as damage to their reputation;
  • for Franchisees - they should undertake appropriate due diligence; not accept blindly what is set out in the Disclosure Document; and obtain legal advice from lawyers experienced in franchising - before entering a Franchise Agreement.
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