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Tuesday, June 6, 2017

Cleaning up the franchising sector – car wash franchisor Geowash next on ACCC's list

By Julia Kovarsky, Associate, and David Hunt, Lawyer

The Australian Competition and Consumer Commission (ACCC) is backing up with decisive action its commitment in this year's Compliance and Enforcement Policy to ensuring small businesses receive the full scope of protection of industry codes, including the Franchising Code of Conduct (the Code). The latest in a string of announcements by the ACCC relating to the franchising sector is that it has commenced action against a national car wash franchisor, Geowash Pty Ltd (Geowash). In doing so, it has again demonstrated its intention to clean up franchising operations. This comes mere weeks after the ACCC obtained penalties from Domino's Pizza and commenced proceedings against Ultra Tune for breaches of the Code (see our earlier articles about Domino's and Ultra Tune).

Proceedings were commenced by the ACCC in the Western Australian registry of the Federal Court on 26 May 2017, with the first case management hearing scheduled for 14 June 2017. The choice of Western Australia as the appropriate registry was likely guided by the fact that most of the franchisees, out of the 30 franchises granted by Geowash across Australia from February 2013 to October 2016, were located in Western Australia.

According to the ACCC's media release, the competition watchdog will allege that Geowash contravened the Australian Consumer Law by making false or misleading representations and engaging in unconscionable conduct, and also breached the provision of the Code which obliges franchisors and franchisees to act in good faith. The obligation to act in good faith was expressly introduced into the Code when it was reviewed in 2014, and came into force on 1 January 2015. The obligation applies to all conduct after that date. Even though the obligation is now set out in clause 6 of the Code, it is still defined by reference to the 'unwritten law from time to time' (see clause 6(1)). A non-exhaustive list of considerations for the Court is included in clause 6(3) of the Code, being whether the party acted honestly and not arbitrarily, and whether the party cooperated to achieve the purposes of the agreement. Other factors to be taken into account by the Court are governed by the case law.

The allegations arise out of representations on Geowash's website from at least November 2015 to May 2016 about the revenues and estimated profits of a Geowash franchise (which the ACCC will allege were made by Geowash without reasonable grounds) and about a commercial relationship or affiliation (which did not exist) with each of Nissan, Kia, Renault, Audi, Emirates, Shell, Hertz, Holden, Ikea, and Thrifty. Additionally, it will be alleged by the ACCC that funds paid by the franchisees were used for purposes not permitted under the respective franchise agreements or otherwise disclosed to the franchisees. This included payment of commissions to Geowash’s director, Sanam Ali, and National Franchising Manager, Charles Cameron. ACCC Deputy Chair Dr Michael Schaper stated that this was particularly concerning. Ms Ali and Mr Cameron are also personally implicated, with the ACCC alleging that they "engaged in and were knowingly concerned in the conduct".

Based on these alleged breaches, the ACCC intends to seek declarations, injunctions, pecuniary penalties, orders for non-party consumer redress, a corrective notice and the disqualification of Ms Ali and Mr Cameron from managing companies.

As these latest proceedings demonstrate, failure by franchisors to comply with their obligations can have adverse consequences, not only for the franchisor company itself but also for the people in charge of it.

The twist in this case is that Geowash is currently operating subject to a Deed of Company Arrangement. The ACCC has had to apply for leave of the Court to commence proceedings against Geowash, because of the nature of the relief it seeks. If leave is granted, this will be the second case commenced by the ACCC in respect of an alleged breach of the Code-imposed obligation to act in good faith since the provision came into effect in 2015, and also the second in the space of two weeks (the action against Ultra Tune having been commenced on 18 May 2017). Justice Gilmour will be hearing the ACCC's application for leave at the first case management hearing next week.

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