Federal Court finds franchisor's conduct unreasonable, unfair, bullying and thuggish

In a stern warning to the franchinsing sector the Federal Court has made it clear that it will not tolerate conduct towards franchisees that shows no regard for conscience or is clearly unreasonable or unfair.

Following a trial where the Australian Competition and Consumer Commission (ACCC) alleged unconscionable conduct in breach of the Trade Practices Act 1974 (the Act), Justice Sundberg concluded, in his landmark decision, that the conduct by Simply No-Knead (Franchising) Pty Ltd disclosed "an overwhelming case of unreasonable, unfair, bullying and thuggish behaviour" against five franchisees that amounts to unconscionable conduct by SNK for the purposes of s.51AC of the Act.

Simply No Knead (Franchising) Pty Ltd, a Melbourne based company, supplied training and material for making bread and related products in the home. The ACCC had identified six categories of conduct on the part of SNK which, it alleged, contravened s.51AC(1):

• refusing to deliver franchised products to the McKinnon, Heidelberg, Canterbury and Ferntree Gully franchises;
• deleting the telephone numbers of the McKinnon, Heidelberg and Canterbury franchises from Telstra's 013 Telephone Directory Assistance Service without the consent or the knowledge of the franchisees;
• unreasonably refusing requests from the franchisees to negotiate matters in dispute with SNK and to discuss matters of concern to the franchisees;
• producing and distributing advertising and promotional material which omitted the names of the franchisees and their franchised businesses;
• selling and offering to sell its products in the territories of the franchisees and in areas proximate to their territories; and
• refusing to provide current disclosure documents to the McKinnon, Heidelberg and Canterbury franchisees in response to written requests. This item was also alleged to be a contravention of s.51AD of the Act, regarding compliance with an applicable industry code, namely, the Franchising Code of Conduct which is a prescribed mandatory industry code.

The ACCC also alleged Cameron Bates who on 18 June 1998 took over as managing director of SNK from his parents Ken Bates and Carol Bates was the person by whom SNK engaged in unconscionable conduct in breach of the Act.

The Court found that SNK had contravened s.51AC (one of the unconscionable conduct provisions) and s.51AD (providing for compliance with an applicable industry code) of the Act and also declared that Cameron Bates was directly knowingly concerned in the contraventions.

"Franchising is an important part of the Australian business sector. Acceptable conduct on the part of franchisors towards franchisees is essential if the sector is going to continue to thrive," Acting ACCC Chairman, Mr Allan Asher, said today.

"I urge all involved in the franchising sector to familiarise themselves with the Court's judgment and in particular the strong language used by Justice Sundberg in characterising the conduct engaged in by Cameron Bates and Simply No Knead." [some of these comments have been reproduced in the Background accompanying this release.]

"The ACCC continues to regard as a high priority the prohibitions on unconscionable conduct in Part IVA of the Act. All businesses, in a position of market power, especially big businesses, must be careful not to abuse that power in their dealings with small business."

"In making his decision Justice Sundberg has helped to clarify the interaction between the three provisions in Part IVA of the Act which all deal with unconscionable conduct.

"It seems clear that while the meaning of 'unconscionable' conduct in s.51AA of the Act will be limited to the meaning it has in equity or unwritten law (case law) from time to time, 'unconscionable' conduct for the purposes of s.51AB and s.51AC of the Act has a broader or expanded meaning. For example, it is not necessary for a person wanting to establish a contravention of sections 51AB or 51AC to show that the weaker party was in a position of "special disadvantage" or "special vulnerability" and that the stronger party took "unfair advantage of that vulnerability" as would be necessary to establish unconscionable conduct for the purposes of equity (or unwritten law).

In particular, the ACCC welcomes his Honour's statements that:– "unconscionable" in s.51AC is not limited to the cases of equitable or unwritten law unconscionability..." and "[w]hether conduct is unconscionable for the purpose of s.51AC is at large. In performing its task the Court is aided but not controlled by the factors listed …".

The acceptance by the Court of this broader meaning of unconscionable conduct in s.51AB and s.51AC will help the ACCC to better protect the interests of small businesses from excesses in conduct by big businesses or businesses with market power.

Background

This decision by Justice Sundberg follows an earlier interlocutory decision by his Honour on 24 December 1999 in which Justice Sundberg dismissed an application by SNK for a stay of the ACCC's action on the grounds that it was vexatious, oppressive and/or an abuse of process and granted interlocutory injunctions to the ACCC restraining SNK from pursuing its various legal actions in the Magistrates Court and County Court against four former SNK franchisees (on condition that those ex-franchisees did not pursue their counter claims against SNK until the determination of the ACCC's action).

On 17 May 2000 the Supreme Court of Victoria ordered that SNK be wound up in insolvency. The State Court proceedings between SNK and four of its ex-franchisees were settled between each franchisee and SNK's Liquidator, with the exception of one franchise who chose not to settle. The ACCC did not seek leave under the Corporations Law to continue its claim against SNK and pursued its action against Cameron Bates alone.

Justice Sundberg made some strong comments in his latest judgment regarding SNK's conduct as alleged by the ACCC. For example:

- On refusal to deliver franchised products –

"The refusal to deliver the franchisees' weekly orders on 4 and 5 August unless the invoices were paid in full (ie the cost of the brochures and the full box of flour) was the exertion of pressure on, and use of unfair tactics against, the franchisees…" and

"SNK's solicitors did not respond to a reasonable request by the franchisees as to why SNK needed the diary [which included the names of those who attended the franchisees' classes]. The intimidating and belligerent memos and letters from Bates compounded the economic threats and pressure inherent in the refusal of the supply of goods known by SNK to be essential to the operation of the franchise. The refusal to supply was the exertion of pressure on and the use of unfair tactics against, the franchisees …" and

"… the refusal to supply was made in order to put pressure on the franchisees to do what SNK wanted done, but had no entitlement to have done."

- On failure to negotiate –

"The claim in SNK's solicitors' letter of 26 August that SNK had "become frustrated in its attempts to include the franchisees in the decision making process" was baseless. Every indicator is to the contrary – refusal to consult, unilateral imposition of conditions, refusal of supply, intimidation, intransigence and lack of good faith. Having regard to the nature of the relationship that ought to exist between franchisor and franchisee, SNK's failure to negotiate in July and August 1988[sic] was unfair, unreasonable and harsh."

- On exclusion from advertising -

"The demand that the franchisees distribute to customers brochures that made no reference to them or their businesses, but only referred to the franchisor and the ways in which it could be contacted and traded with, and that the franchisees pay for the privilege, in default of which they were denied the very products they needed to run their businesses, was unfair and unreasonable having regard to the franchisor/franchisee relationship, and oppressive."

- On competing with franchisees -

"Between July and November 1998 SNK

advertised, in newspapers circulating within the franchisees' territories, in which the franchisees themselves advertised, the fact that franchised products were available for purchase from SNK, with free delivery on request for purchases of $25 or more;

advertised in those newspapers and in a promotional brochure that franchised products were available at independent retail outlets, including outlets within the franchisees' territories

sold franchised products, directly and indirectly, to independent retail outlets, including outlets within the franchisees' territories.

This conduct was calculated to damage the franchised businesses, in the sense that SNK must have known it would damage them. It was inconsistent with a proper relationship between franchisor and franchisee, and demonstrated a lack of good faith on the part of SNK.

- On refusal to provide a disclosure document

"The Heidelberg, Canterbury and McKinnon franchisees made written requests for disclosure documents. They were not provided. The treatment of the Heidelberg franchisees' request amounted to more than a mere failure to provide the documents. As a condition of agreeing to provide it SNK insisted on knowing whether the franchisees intended to renew the agreement. Until they indicted an intention to renew, "there will not be a Disclosure Document provided". The purpose of a disclosure document is to give a prospective franchisee, or one proposing to renew, information to help the franchisee make a reasonably informed decision on the matter. SNK's conduct was calculated to frustrate the intention of the Code – that a franchisee would have relevant information before being required to commit itself. Once again one sees the bullying tactics that characterise Bates' conduct of his relations with SNK's franchisees. It was harsh and oppressive conduct."

Finally Justice Sundberg's conclusion on unconscionability included:

"…that conduct, in particular competing with the franchisees, refusing to supply products for (at least on two occasions) contrived reasons, omitting the franchisees' names from the brochures and the hostile and pugnacious manner in which Bates dealt with them shows that soon after the franchisees' letter of 21 July 1998 (if not before) SNK devised a plan intended to cause the franchisees to terminate or not renew their franchise agreements. SNK's conduct achieved its aim. Between August and November all the franchisees either terminated their agreements or did not renew them. There is no doubt that SNK's conduct was a cause of their respective decisions in this regard. Some support for the conclusion that SNK's conduct was calculated to achieve the end result comes from its own mouth. For example, after the Park Orchards franchise closed. SNK wrote to former customers of the franchise. The letter contained these passages:

"We would like to apologise for the sudden closure of Simply No Knead Park Orchards. We, like you, had no idea this was to happen.

…Over the years we have found that franchising our business has been very restrictive. We now have the opportunity to distribute our products over a much wider area and not be restricted to one central outlet as in the past. This will make accessing SNk's products much easier."

SNK's plan and its implementation constitute unconscionable conduct for the purposes of s.51AC(1)."