We don’t listen to a lot of psychedelic rock here at StevensVuaran Lawyers, but this week we’ve been blasting out “Are You Experienced”, the debut record by The Jimi Hendrix Experience. We’ve been doing that not because we’re a bit slow in celebrating the album’s 50th anniversary (we were on that back in May) but because “Are you experienced?” is also a question posed by the Franchising Code of Conduct (and which was recently considered by the Federal Court).
The Franchising Code of Conduct requires franchisors to disclose certain information to franchisees (or prospective franchisees) in a disclosure document. One of the matters which must be disclosed is the “relevant business experience” of each “officer” of the franchisor. “Officer” has the same meaning as in the Corporations Act, so it includes at least the directors of the franchisor, but will often include other people. But what is the “relevant business experience” which needs to be disclosed?
The recent case concerned a company called Morild Pty Ltd, which was the franchisor of the “Pastacup” franchise system. One Mr Bernstein was the director of Morild. The franchise disclosure documents disclosed that Mr Bernstein was experienced in running cafes and food outlets and that he was “responsible for the Pastacup concept” (in a version of the disclosure document used in 2014) and “the founder of the Pastacup concept” (in a version used in 2016).
However, what the disclosure documents somehow failed to mention was that Mr Bernstein had been the director of two previous Pastacup franchisors which had boiled dry – the first being a company called SSP Holdings Pty Ltd (which was wound up voluntarily in late 2013 because it was insolvent) and the second being a company called Pastacup Australia Pty Ltd (which was ordered to be wound up in late 2014 because it was insolvent). It is not difficult to see that if you were considering investing in a fast-food franchise, it would certainly be useful that the previous franchisors had ended up in the soup.
As the Court pointed out, that information was especially important in relation to Pastacup because the intellectual property in the franchise was owned by a separate company called Pastacup International, which licensed the intellectual property to Morild. As that licence could be terminated if Morild became insolvent, the consequences for the franchisees if Morild followed the fate of its predecessors (and ended up penne-less) might be severe.
Both Morild and Mr Bernstein agreed that they had contravened to the Franchising Code of Conduct (and by so doing, contravened section 51ACB of the Competition and Consumer Act 2010 (Cth). Although the Court held that there was no evidence of wilful non-disclosure, the Court also found that “the importance of the disclosure of Mr Bernstein’s involvement in SSP Holdings and Pastacup Australia, which each became insolvent, should have been clear to a reasonable person in Mr Bernstein’s position”. The Court made various orders including an order that Morild pay a penalty of $100,000 and Mr Bernstein pay a penalty of $50,000 for his involvement in the contravention.
This is the first case in which the current iteration of the Franchising Code of Conduct (which came into effect on 1 January 2015) has been considered. The lesson for franchisors is clear – franchisors can’t afford to “set and forget” with disclosure documents. Franchise disclosures need to be prepared with considerable care (and also need to be kept up to date as the required information, such as the identity and experience of relevant officers, changes).
In “Are You Experienced?”, Jimi Hendrix sang “If you can just get your mind together/Then come on across to me”. Conversely, as this case shows, if you can’t just get your franchising disclosure documents together, then you might come across enforcement action by the ACCC. There are many possible responses to ACCC enforcement action, but “groovy scene, man” is not usually one of them.
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