In a stern warning to the franchising 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, 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.