On 24 January 2020, the Federal Court of Australia ruled on the penalties to apply for a franchisor who had made false representations to its franchisees and prospective franchisees over a number of years – including in pre-contract disclosure documents. The case related to the Geowash car washing franchise.
The Court imposed significant penalties for contraventions of the Australian Consumer Law and the Franchising Code of Conduct. Notable was that they were imposed on both the franchisor entity as well as two individuals who caused the franchisor entity to breach the laws. The pecuniary penalties were high:
- For the franchisor entity: AU$2.5 million
- For the sole director of the franchisor: over AU$1 million
- For the national manager in charge of franchising at the franchisor: over AU$650,000
The director and manager were ordered to pay AU$500,000 each personally also by way of non-party consumer redress for the losses and damage suffered by franchisees. They were each also disqualified from managing a corporation for a number of years.
The case will be important to anyone involved in negotiating franchise agreements or operating as or on behalf of a franchisor in Australia. To minimise the risk of being held personally liable for the actions of the franchisor company in breach of the Australian laws, directors, officers and managers of franchisor companies need to design and establish robust systems for compliance with laws and monitor compliance.
Dentons Australia Limited's head of franchising, Robyn Chatwood, explains below.
Background to the case
The background to the case is that Geowash Pty Ltd (Geowash) entered into franchise agreements with 18 franchisees who commenced trading as hand car wash and detailing businesses. Two people had key roles at Geowash in negotiating the franchise agreements with franchisees and in operating the franchisor’s business: Ms Sanam Ali, the sole director of Geowash, and Mr Charles Cameron, Geowash’s national franchising manager.
In late 2015, the Australian Competition and Consumer Commission (ACCC), who regulates the franchising sector, began investigating Geowash following complaints from franchisees. The ACCC subsequently launched court proceedings alleging that Geowash:
- Made false or misleading representations on its website by suggesting that:
- Prospective franchisees could make certain revenues and profits (when it had no reasonable basis for those claims).
- Geowash had commercial relationships or affiliations with other major corporate entities such as Hertz and Thrifty (when in fact it did not).
- Acted unconscionably towards franchisees by charging its franchisees amounts for fit outs which did not reflect the costs but instead reflected the sums franchisees were willing to pay.
- Did not act in good faith towards its franchisees as required under the Franchising Code of Conduct.
After the proceedings commenced, Geowash went into voluntary administration.
What did the Court decide
In a decision handed down on 8 February 2019, the Federal Court of Australia agreed with the ACCC and held that Geowash, the sole director and the national franchising manager breached the Australian Consumer Law (ACL) and the Competition and Consumer Act 2010 (Cth) (CCA) in their dealings with franchisees.
In short, the Court found that Geowash represented that the charges it charged franchisees for the fitout and setup of each franchise site would be for the actual costs incurred by Geowash - when in fact the intention was to charge by reference to what each franchisee was willing to pay and Geowash would use the money to pay commissions and meet general operating costs and expenses of Geowash. Geowash had kept no records showing how the money it charged to each franchisee was spent on fitout and setup and payments by Geowash to the two individuals were described in its bank statements as 'commissions'.
The Federal Court of Australia, in addition to holding the franchisor company liable, held the director and manager personally liable for the breaches by Geowash and imposed significant penalties on the company and the individuals concerned. The penalties on the two individuals were imposed as the Court found they caused Geowash to engage in the contraventions and so they were directly or indirectly knowingly concerned in, or a party to, the breaches by Geowash.
The case shows the continued focus of Australian regulators on misconduct of directors, officers and managers who cause companies to breach laws - whether directly or indirectly, or whether by act or by failing to act.
The large penalties are consistent with the January 2019 Federal Court decision (where a penalty of AU$2.6 million was ordered against Australia’s second largest motor repair organisation, Ultra Tune Australia) after ACCC action for contraventions of Australian franchising laws.
An aspect that is interesting is that the ACCC invited the Court to consider contraventions as specific to each franchisee who was harmed and so each would be a separate breach, attracting to its own potential maximum penalty. This approach is in contrast to an approach of the ACCC to focus on a course of conduct or collective patterns of behaviour – which might be aggregated under one maximum penalty. This approach has been successful in the Geowash case – and foreshadows how regulators in the future may advance their cases. This means that the risks relating to the quantum of penalties that may apply for contraventions of the Australian franchising laws increase.
The case is a reminder of the risks to anyone involved in selling franchises to franchisees or operating franchises for a franchisor entity. Unless the managers, officers and directors ensure the systems are designed to achieve compliance with franchising laws and in fact do achieve that outcome, there is a risk that the individuals who cause breaches by the franchisor entity of the laws will be held personally liable and incur significant penalties.
- Australian Competition and Consumer Commission v Geowash Pty Ltd (Subject to a Deed of Company Arrangement) (No 4)  FCA 23 (24 January 2020)↩
- Australian Competition and Consumer Commission v Geowash Pty Ltd (Subject to a Deed of Company Arrangement) (No 3)  FCA 72 (8 February 2019)↩
- ACCC v Ultra Tune Australia Pty Ltd  FCA 12 (18 January 2019)↩