The Australian Competition and Consumer Commission last week revealed it has commenced Federal Court proceedings against the franchisor of Western Australian quick service restaurant Pastacup and the company’s former director, Stuart Bernstein, with allegations that the Franchising Code of Conduct had been breached.
The ACCC alleges a mandatory disclosure document for potential franchisees did not disclose the information that Bernstein had previously been director of two other Pastacup franchisor companies that became insolvent. It believes that the current franchisor, Morild Pty Ltd, should have passed on this information to franchisees.
This case is the first time the ACCC has sought to exercise its powers to seek penalties for a breach of the code.
“We’re not saying Pastacup is not operating a valid system,” ACCC deputy chair Dr Michael Schaper told SmartCompany.
“But franchisees require full information, [such as:] ‘What I’m likely to earn, what my term is going to be,’ and who are the people behind it.”
SmartCompany has attempted to contact Pastacup head office, Morild Pty Ltd and Stuart Bernstein on multiple occassions over the past two days and have not received a response.
The ACCC is keen to give potential franchisees information about their rights and responsibilities when entering a franchise agreement. Franchise network managers regularly speak about the importance of communication between head office and franchisees, but the commission is keen to highlight that this process must start prior to a deal being signed.
So if you’re looking into buying a franchised business or are a franchisor taking on new franchisees, here’s what you need to know to ensure best practice.
What is the Franchising Code of Conduct?
A revised version of the Franchising Code of Conduct came into effect on January 1, 2015. The aim of the changes made was to promote honesty – the code now contains the provision that both franchisees and franchisors act “in good faith” towards each other. In broad terms, this means the ACCC is on the lookout for instances in which one party fails to act with the legitimate interests of the other party at heart, acts dishonestly or with an ulterior motive.
“It requires the franchisor to provide full information to the franchisee about the company itself,” says Schaper.
“We think that’s pretty important.”
When penalties are involved?
The new code also allows for penalties to be handed down if the ACCC believes there has been a breach – up to $54,000. A court has the final say on the amount imposed.
Infringement notices can also be handed down of up to $9000 for body corporate entities or $1800 for individuals, for each breach of the code.
What happens if information is withheld?
The aim of initial disclosure documents should be to outline the nature of the business, terms of the franchise deal, the history of the business and the parties involved.
“You’re meant to get a copy of the contract and the disclosure document” when signing on to a franchise system, says Schaper.
“Even then, there still might be questions you want to ask.”
The costs of running a franchise can be significant, which is why it’s important that franchisees have all available information about a business before making the decision to sign on.
“It’s a fair amount of money on an ongoing basis,” Shaper says.
If a franchisor is not forthcoming about information when a potential franchisee requests it, it raises the question of ‘why’, says Schaper.
“The first point of call for details is the franchisor,” he says.
“If you’re asking those questions and someone is reluctant to give those answers, the major point to consider is that you should look carefully [at the details] and be sure.”
If incomplete details are provided or franchisees have another concern that cannot be resolved with the franchisor, the issue can be referred to the ACCC.
“We have an audit power – an information gathering power – and under the franchising code we can request specific documents,” says Schaper. From there, if a breach of the code is identified, an infringement notice might be handed down or court proceedings commenced.
Compliance manuals for the code are available for both franchisors and franchisees.
To read a copy of the Franchisor Compliance manual, click here.
To read a copy of the Franchisee manual, click here.