As a franchisor, do you always follow the Code? Read on to find out how it all went wrong for Geowash and what you need to be aware of when communicating with a prospective franchisee.
In 2019, the Australian Competition and Consumer Commission (“ACCC”) successfully prosecuted former hand car wash and detailing franchisor Geowash in the Federal Court for acting unconscionably, making false or misleading representations, and failing to act in good faith in breach of the Franchising Code of Conduct (the “Code”) in relation to the sale and marketing of its franchises.
In January of this year, the Court ordered $4.2 million in penalties against Geowash, its director Ms Sanam Ali and its franchising manager Mr Charles Cameron for breaches of the Australian Consumer Law. This included penalties of $1.045 million against Ms Ali and $656,000 against Mr Cameron. The Court also ordered Ms Ali and Mr Cameron to pay $1 million as partial redress to franchisees for the losses they suffered as a result of Ms Ali and Mr Cameron’s conduct. Both individuals were also disqualified from managing corporations in Australia, with Ms Ali disqualified for five years and Mr Cameron for four years.
Following an investigation and court case that began in 2015, the Court found that Geowash made false representations about:
- The potential revenue and profitability of a Geowash franchise. Geowash had claimed that franchisees could make a monthly average revenue of $70,216 and a gross average profit of $30,439 a month. These figures were obtained by Geowash from a single franchisee based on 1 month of sales, which was used to forecast a (favourable and attractive) annual profit for a franchise across the entire franchise network. This information was held to be misleading as it was used to entice prospective franchisees, as opposed to conveying an accurate prediction of profitability;
- Commercial relationships and affiliations. On its website, Geowash claimed that it had commercial relationships with major motor vehicle dealers / suppliers and other companies such as Nissan, Kia, Renault, Audi, Emirates, Shell, Hertz, Holden, Ikea and Thrifty, when it did not; and,
- Invoices. Geowash had repeatedly misrepresented invoices by stating that they were for the fit-out of car-wash sites and start-up expenses, when in fact a “large proportion” were paid out as commissions to Ms Ali and Mr Cameron and Geowash’s expenses. Justice Colvin found these arrangements ‘went beyond a failure to observe the terms of the franchise agreement’.
In addition, Geowash was found to have engaged in unconscionable conduct through its invoicing and charging practices. Geowash had adopted the practice of charging a franchisee based on what they thought the franchisee would be willing or able to pay, as opposed to the likely and actual cost only for fit-out and establishment. The Court found that the likely consequence of this conduct was that the funds were not readily available for the fit-out and establishment of the site for the franchise, which resulted in inferior sites being built or sites not being delivered.
The Court also held that Geowash’s conduct in relation to the sale and marketing of its franchises was in breach of the good faith obligation found in the Code. Ms Ali and Mr Cameron were quite rightly “named and shamed” and found to have aided and abetted the franchisor to breach its obligations.
Key Takeaways for Franchisors
The significant penalties issued by the Court against Geowash, in addition to the penalties imposed against Ultra Tune for similar breaches of the Code in 2019 sends a clear and strong message to franchisors and franchise executives about the importance of complying with their obligations under the Code and the Australian Consumer Law in relation to its dealings with a prospective franchisee. These two cases clearly demonstrate that compliance of the Code by franchisors is on the radar of the ACCC and highlight the need for franchisors to engage in honest dialogue with franchisees and the importance of disclosing truthful and accurate information when required.
If you are a franchisor and need assistance or advice in relation to your engagement and recruitment process with prospective franchisees or complying with your obligations under the Code, please don’t hesitate to get in touch with Coleman Greig’s Franchising team who would be more than happy to assist.
