The Federal Court has found that a Victorian-based cleaning franchise engaged in unconscionable conduct in contravention of the Australian Consumer Law.
The case involves South East Melbourne Cleaning Pty Ltd (in liquidation) (formerly Coverall Cleaning Concepts South East Melbourne Pty Ltd) (Coverall Melbourne), the former Victorian franchisor of a national cleaning services franchise.
The Court found the company engaged in misleading conduct and made false or misleading representations in regards to its “Coverall Australasia Franchise Plan,” which was presented to two franchisees.
The plan represented that a particular investment by each of the franchisees would result in them earning specified monthly amounts.
This was seen as a contravention of the Franchising Code of Conduct as the document was not based on reasonable grounds.
Coverall Melbourne was also found to have contravened the Code by failing to pay the two franchisees for the cleaning services they had provided.
The court decisions follow on from actions by the Australian Competition and Consumer Commission (ACCC), which saw it first bring the case to court in July.
The organisation’s deputy chair, Dr Michael Schaper said: “Businesses that provide earnings information to franchisees must ensure they have a reasonable basis for making any earnings representations.
“The ACCC considered that Coverall Melbourne’s conduct was particularly egregious because, following its misleading behaviour when signing up these franchisees, Coverall Melbourne then failed to pay them for the work they had done.”
The Court declared that Coverall Melbourne’s failure to pay the amounts owing to the franchisees, while also demanding payment of the initial franchise fee, was in all the circumstances unconscionable, particularly as the franchisees had significantly weaker bargaining power than Coverall Melbourne.
“Unconscionable conduct that impacts consumers or small businesses is an ACCC enforcement priority,” Dr Schaper said.
The Court declared that Coverall Melbourne’s franchise agreements with the two franchisees were void from the date of the orders.
Coverall Melbourne’s former director, Brett Jones was found to be knowingly concerned in the company’s unconscionable conduct contraventions, and has been ordered to pay a penalty of $30,000 and to compensate the two affected franchisees just over $23,000.
The compensation includes the franchise fee they paid, as well as the monies owed to them for the cleaning work they completed.
He was also ordered to pay a contribution toward the ACCC’s costs.
Apart from monetary penalties, Jones has been disqualified from managing a corporation for two years, and neither he or the company’s former sales manager, Astrid Haley are permitted to be directly or indirectly involved in the management and/or marketing of a franchise business for the next two years.
A hearing in relation to the pecuniary penalty to be imposed on Coverall Melbourne will be held on a date to be fixed by the Court.
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