ACCC v Morild Pty Ltd [2017] FCA 1308: Franchisor Penalised for Breaches of the Franchising Code

Friday 17 November 2017 @ 12.54 p.m. | Legal Research | Trade & Commerce

In a recent court action brought by the Australian Competition and Consumer Commission (ACCC), the Federal Court, on 10 November 2017, handed down a judgment ordering the franchisor of Pastacup (Morild Pty Ltd) (Morild) to pay penalties of $100,000 for breaches of the Franchising Code of Conduct (the Code) as well as numerous breaches of the Competition and Consumer Act 2010 (Cth).

The Franchising Code of Conduct is contained in Sch 1 to the Competition and Consumer (Industry Codes—Franchising) Regulation 2014 (Cth). The ACCC commenced its action against Morild Pty Ltd in September 2016.

Background to the Case

The Franchising Code of Conduct was revised on 1 January 2015 to include new financial penalties and infringement notices for serious breaches of the Code.

The Code declares that a franchisor must provide:

  • a disclosure document;
  • the franchise agreement (in its final form); and
  • a copy of the Franchising Code at least 14 days before commencement of the agreement.

Part 2, Division 2, Clause 9 of the Code states:

“9  Franchisor to give documents to a franchisee or prospective franchisee
…
(c)  a copy of the franchise agreement, in the form in which it is to be executed;
to a prospective franchisee at least 14 days before the prospective franchisee:
(d) enters into a franchise agreement or an agreement to enter into a franchise agreement; or
(e) makes a non‑refundable payment (whether of money or of other valuable consideration) to the franchisor or an associate of the franchisor in connection with the proposed franchise agreement.
Civil penalty: 300 penalty units.”

Information in the disclosure document is required to include information about a number of important matters including financial details of the franchisor, operating costs and fees, contact details of current and former franchisees, the business experience for the past 10 years of each officer of the franchisor, whether there is an exclusive territory, and conditions for renewal and termination.

Findings of the Court

His Honour found at [para 79] that:

“ … between 1 January 2015 and at least 8 January 2016, Morild failed to create a compliant disclosure document, contravening cl 8(1) of the Franchising Code … between 18 March 2015 and 25 September 2015, Morild failed to give a compliant disclosure document to the Prospective Franchisees, contravening cl 9(1) of the Franchising Code.”

His Honour also noted that the failure by Stuart Bernstein to disclose his previous directorship of insolvent Pastacup franchisors [see para 34 of judgment] and his relevant business experience, which was required to be disclosed to prospective franchisees in Morild’s disclosure document, caused him to be knowingly concerned in [with] the conduct of the company.

McKerracher J also ordered that the company’s co-founder and former director [Stuart Bernstein], pay $50,000 for being knowingly concerned in the breaches.

Comment and Reaction from the ACCC

In a recently issued ACCC Media Release, the ACCC Deputy Chair, Dr Michael Schaper commented:

“These are the first court ordered penalties for breaches of the new Franchising Code. These significant penalties should send a strong message to other franchisors that they must meet their disclosure obligations. The Franchising Code requires franchisors to provide prospective franchisees with a disclosure document which contains important information about the franchise and the franchisor. Full and accurate disclosure by the franchisor is essential to enable prospective franchisees to make informed business decisions.”

Morild also consented to the Court-imposed penalties, declarations and injunctions as well as to an order that it pay a contribution of $12,000 to the costs incurred by the ACCC.

Recent Franchising Action by the ACCC

The ACCC has recently taken court action against other companies for breaches of the Franchising Code. They have included:

  • Domino’s Pizza Enterprises Ltd was penalised $18,000 for failure to comply with the requirement in the Franchising Code of Conduct to provide franchisees with both an annual marketing fund financial statement and an auditor’s report within the time limits prescribed under the Code; and
  • Ultra Tune for allegations of false representations, misleading and deceptive conduct and breaches of the Franchising Code. It was alleged that in 2015, Ultra Tune failed to act in good faith in its dealing with a prospective franchisee, and failed to provide this prospective franchisee with documents the Code specifies must be provided before accepting a non-refundable payment.

In the Ultra Tune court action, the ACCC claims that Ultra Tune was also in breach of the Australian Consumer Law (the ACL) by making false or misleading representations to the prospective franchisee about the franchise site.

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Sources:

Pastacup to pay $100,000 for breaches of new Franchising Code – ACCC Media Release MR 203/17

ACCC Franchising investigations

Australian Competition and Consumer Commission v Morild Pty Ltd [2017] FCA 1308 (10 November 2017)

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