A decision by the Federal Court today should bring home to franchisors the importance of being truthful when giving guarantees of business success or when predicting income.
In handing down his decision, O'Loughlin J. found that claims by A.1 Mobile Radiator Repairs Pty Ltd*, and its director, Norman Sidney Trayling of Lobethal were misleading in breach of the Trade Practices Act 1974.
"The misrepresentations proved were numerous," he said. "They ranged in seriousness from those that were relatively minor to others that, in my assessment of Mr Trayling's activities, were very serious."
In particular, regarding the representations about supply of work to franchisees, he found that "these inducements were patently false these were the most fundamental statements because they represented the assurance of work that would, in turn, generate a cash flow and an income to the franchisee."
The Australian Competition and Consumer Commission began the proceedings last November seeking declarations and orders, which included refunds and costs. Interim injunctions were issued at that time which prevented further representations being made unless they could be substantiated. Since then, the company has gone into liquidation and Mr Trayling has been declared bankrupt.
The ACCC action followed allegations by four franchisees that they had been lured into paying up to $22,500 to purchase business franchises as a result of advertising and promotional representations which were either untrue or made with reckless indifference. These included:
- the potential of the franchise was thoroughly researched and there was strong demand; an existing franchisee earnt over $12,000 in a single month;
- there would be exclusive territories for each franchise;
- that all work for the franchisee would be referred from the franchisor;
- franchisees would only have to do minimal canvassing for customers;
- franchisees would be able to earn $50,000 to $55,000 per year; franchisees would be given full training and support.
All the franchisees' businesses had failed. They had lost not only their money but also months of fruitless work in trying to build businesses which had no prospect of success.
All the allegations relate to the franchising business run by Norman Trayling, not to individual radiator repairers who may still be operating using the A1 Mobile Radiator Repair name.
The court made a declaration that Mr Trayling's conduct had breached the Act and granted permanent injunctions to prevent him from engaging in like activities in the future. It further ordered refunds to the franchisees totalling $77,500 plus interest, and the ACCC's costs.
"Under the Act companies are prohibited from making false or misleading representations," ACCC Chairman, Professor Allan Fels, said today. "This action highlights the ACCC's commitment to small business issues, particularly following the recent introduction of the Franchising Code of Conduct.
"Fully operational since 1 October last year, the Code now gives greater protection for those entering into or renewing franchise agreements."
Further information regarding franchising and the Franchising Code of Conduct is set out in the ACCC publication, The franchisee's guide, which is available free of charge from all ACCC offices or alternatively from the ACCC website, http://www.accc.gov.au.
*The business is based in Adelaide, South Australia.