The Federal Court in Sydney yesterday made declarations by consent that a Newcastle-based business was in fact a franchising scheme and its franchises protected by the mandatory Franchising Code of Conduct.
The Australian Competition and Consumer Commission had alleged that the directors had tried to characterise the operation as a licensing arrangement when it was not and deny franchisees of certain rights.
The ACCC alleged that Synergy in Business Pty Ltd (in liquidation) had advertised throughout Australia to sign up consultants. It then entered license deeds with these people to promote and sell Synergy's small business training and development program, known as the Best Practice Program.
The court, after considering the terms of the license deed and the agreed statement of facts provided by the parties, was satisfied that more than 30 licence deeds, mainly sold for between $19,000 and $24,000 each, were franchise agreements.
The ACCC sought to ensure the protections afforded by the mandatory Franchising Code covered all the franchisees. Under the Code a franchisor must disclose specific information including, among other things, the basis for any income projections, the exclusivity or non-exclusivity of franchise territories, details of existing franchisees, and background to the franchisor’s business experience.
The ACCC alleged that Synergy specifically attempted to exclude the licence arrangement from being characterised as a franchise by including a clause in the licence contract to that effect and by making oral representations to prospective licensees. The ACCC believed Synergy was a franchise and operates as such in practice. By posing as a licensor Synergy failed to provide franchisees with disclosure information and did not afford reasonable opportunity to obtain independent advice about the licence deeds. Moreover, franchisees were not given a 'cooling off' period before entering the franchise agreement as required by the code.
By consent of the parties, Justice Stone made declarations that Synergy and its directors, Ms Helen Ewing and Mr Chris Hudman, had contravened the Franchising Code of Conduct and therefore section 51AD of the Trade Practices Act 1974.
The court also declared by consent that Ms Ewing and Mr Hudman were knowingly concerned in misleading and deceptive conduct in breach of sections 52 and 59(2) of the Act in relation to future profits of $100,000 plus per annum that could be made from promoting the Best Practice Program.
"The Franchising Code exists to ensure that best industry practice is observed and that the interests of all parties are protected", ACCC Chairman, Mr Graeme Samuel, said today. "The ACCC investigated this matter because it appeared that Synergy's directors were selling franchises under the guise of licensing arrangements, thereby attempting to contract out of their obligations under the Code and also engaging in misleading and deceptive conduct".
The court ordered by consent of the parties that Synergy's directors carry out their various obligations under the Franchising Code including providing franchisees with a 'cooling off' period of seven days and, where any franchisee elects to terminate the agreement within the cooling off period, refund the franchising fee.
The court also ordered that the directors:
- inform the franchisees of full particulars of the court's findings;
- disclose the existence of the proceedings to any prospective purchaser of any franchise in which the directors are in involved over the next three years; and
- implement a trade practices compliance program if they become in any way concerned with the business of promoting or selling franchises within the next three years.
The court made injunctions restraining the directors from inducing prospective purchasers to enter a franchise agreement by making representations that are untrue or that they have no reasonable grounds to believe are true.
"This is a positive outcome which should give the franchising community confidence that the Franchising Code of Conduct, which is designed to guarantee procedural fairness, is observed in the promotion, sale and life of a franchise agreement", Mr Samuel said.