The consumer watchdog has secured $100,000 in penalties against food chain PastaCup and $50,000 against its co-founder after taking Federal Court action last year over claims disclosure documents given to potential franchisees breached the Franchising Code.
The Australian Competition and Consumer Commission (ACCC) took action against the chain’s franchisor Morild Pty Ltd last year, alleging documents given to potential franchisees about PastaCup did not disclose that co-founder and former director Stuart Bernstein had been the director of two previous franchisors of the PastaCup network that became insolvent.
The watchdog claimed this was a breach of mandatory reporting that must happen under the Franchising Code of Conduct, which requires a franchisor to give franchisees all information about relevant business experience of all of its officers.
The Federal Court found Bernstein’s directorship of the previous PastaCup franchisors that became insolvent was relevant information and should have been included in document for potential franchisees.
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The chain’s current franchisor, Morild, was ordered to pay $100,000 for breaching the code, while Bernstein has also been ordered to pay $50,000 for being “knowingly concerned” in the breaches.
ACCC deputy chair Michael Schaper said in a statement last week the significant penalties were the first successful court enforcement of the new Franchising Code, which came into effect in 2015.
“Full and accurate disclosure by the franchisor is essential to enable prospective franchisees to make informed business decisions,” Schaper said.
Principal lawyer at Enco Legal Narissa Corrigan tells SmartCompany that while the Franchising Code does make it very clear franchisors should disclose all relevant business history to franchisees, it’s still important for those thinking about getting into a franchise arrangement to do their own checks.
“Under the code you must disclose relevant information, and these matters include things like insolvency, any regulatory action that was taken against you,” Corrigan says.
“But if a franchisee is concerned, they can always do searches on particular people — do your own research.”
SmartCompany contacted PastaCup for comment but did not receive a response prior to publication. Bernstein could not be contacted for comment this morning.
Full disclosure is best practice
The Franchising Code has strict definitions of the types of information that have to be relayed to potential franchisees, but outside of the world of franchising, entrepreneurs should be straightforward when disclosing their own business histories, says LegalVision’s Franchising team practice leader, Emma Jervis.
She recommends entrepreneurs be up-front with potential business partners about their previous experience in business because, even though there is no disclosure framework for non-franchise businesses, operators could still open themselves up to disputes down the line if they don’t disclose important information.
“Particularly if something will be a long-term business agreement, it pays to be informed,” Jervis says of a business partner’s history.
When it comes to doing research about a franchise or business, Jervis recommends entrepreneurs do their own research into both the company and individuals involved with it.
“Ask questions about who the directors are, what their relationships are [to the business], and undertake all the searches available to you, through things like the bankruptcy register.”
While some individuals might feel awkward about putting specific questions to a franchisor or potential business partner about their backgrounds, Jervis says it’s important to get answers to any questions you have.
“If they have nothing to hide, they won’t be concerned,” she says.