The meaning of a franchise agreement has been further defined in a judgment handed down by the Federal Court yesterday.
Justice Tracey yesterday dismissed the Australian Competition and Consumer Commission's application against Kyloe Pty Ltd, Impact Design Accessories Pty Ltd and associated persons in July 2006 for alleged contraventions of the Franchising Code of Conduct and section 51AD of the Trade Practices Act 1974.
Justice Tracey found that the Polar Krush ice drink business conducted by Kyloe and Impact did not constitute a franchise as defined by the code.
The ACCC had alleged that Kyloe, Impact and associated persons in promoting and operating the Polar Krush Ice drink franchise:
- failed to provide franchisees with a disclosure document
- provided earnings information that was not based on reasonable grounds
- failed to provide franchisees with a 7 day-cooling off period
- prevented prospective sub-distributors from associating with and contacting other franchisees
- failed to request written statements from prospective franchisees that they had/had not received independent advice, and
- failed to provide an internal complaint handling procedure in agreements.
The ACCC had further alleged that the contraventions arose as a direct consequence of the respondent's failed attempt to contract out of the Franchising Code of Conduct by calling its contracts "sub-distribution agreements" rather than franchise agreements.
ACCC Chairman, Mr Graeme Samuel, said the court findings indicate that the protections provided under the code will not be available to those persons purchasing a business unless the components of Clause 4 of the code are satisfied – that is that a "franchise agreement" existed within the meaning of the code.
"The ACCC will continue to examine closely any business conduct that appears to be attempting to avoid the mandatory code, and subject to legal advice use the court to enforce the protection established by the Act."
In this case, the court found that the distributor relationships were not covered by the code and therefore the Polar Krush sub-distributors were not entitled to the protections offered under the code. In other cases the courts have found that particular distribution agreements were in fact franchise agreements.
Justice Tracey did note that had a franchise agreement existed, to which the code applied, both Kyloe and Impact contravened the code by, at least, failing to give a current disclosure document to each prospective sub-distributor and failing to give a copy of the code to each sub-distributor at least 14 days prior to entering into the relevant franchise agreement.
The ACCC is considering the wider implication of the judgment.