It is mandatory under the Franchising Code of Conduct for a franchisor to disclose relevant business experience to prospective franchisees, including information about previous insolvency events.
For the first time, the Australian Competition and Consumer Commission (ACCC) has sought penalties for breaches of the Code in the Federal Court. The revised Code (which came into effect on 1 January 2015) introduced financial penalties and infringement notices for serious breaches.
The ACCC has taken action against current franchisor of Pastacup, Morild Pty Ltd (Morild) and the company’s former director, Mr. Bernstein, for incomplete disclosure of information.
Bernstein co-founded the franchise in 2008. He managed and was a director of two previous Pastacup franchisor companies which became insolvent. The ACCC alleges that this information should have been disclosed by Morild to potential franchisees and that Bernstein was knowingly concerned in this conduct.
The ACCC is seeking penalties, injunctions, declarations, finding of fact and costs. We’ll keep you updated on developments.
Take away lesson
While franchisees are independent businesspeople, it is important that they are able to make informed decisions from complete and accurate disclosure of information by the franchisor.
The revised Code ensures prospective franchisees the protection of increased disclosure prior to entering the franchise relationship. It is expected that remedies such as those sought by the ACCC will act as an effective deterrent to franchisor conduct similar to that alleged against Morild and Bernstein.
As the breaches alleged by the ACCC in this case would significantly impact a franchisee’s decision to proceed with acquiring a franchise, it is appropriate that remedies under the Competition and Consumer Act 2010 be sought. However, the precedent of Master Education Services Pty Limited v Jean Florence Ketchell  HCA 38 demonstrates that a breach resulting in no substantial disadvantage to the franchisee in the circumstances may not warrant the grant of a remedy.
Our franchise team is internationally recognised as among the experts in their field, and have assisted many clients with their compliance needs. If you have any questions or need assistance with franchise law compliance, please do not hesitate to contact our team.