The Federal Court has ordered Pastacup franchisor Morild Pty Ltd (Morild) to pay penalties of $100,000 for breaches of the Franchising Code of Conduct (Franchising Code), following ACCC proceedings. The company’s co-founder and former director, Mr Stuart Bernstein, has also been ordered to pay $50,000 for being knowingly concerned in the breaches.
Mr Bernstein co-founded the Pastacup franchise in 2008 and has managed and been a director of two previous franchisors of the Pastacup franchise system that each became insolvent.
The Court found that Morild failed to provide a disclosure document which complied with the Franchising Code to franchisees, because the document provided failed to disclose Mr Bernstein’s previous directorship of the insolvent Pastacup franchisors. The Court held that this was relevant business experience that was required to be disclosed to prospective franchisees in Morild’s disclosure document. The Court also found that Mr Bernstein was knowingly concerned in Morild’s conduct.
“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,” ACCC Deputy Chair Dr Michael Schaper said.
“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 consented to the penalties, declarations and injunctions by the Court and to an order that it pay a contribution to the ACCC’s costs.
Background
On 1 January 2015, a revised Franchising Code of Conduct came into effect. The revised Code introduced financial penalties and infringement notices for serious breaches of the code.
The ACCC began action against Morild in September 2016.
Under the code, the 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.
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.
Businesses can access further information on the code from Franchising Code of Conduct.