Pastacup To Pay For Falling Short Of The Franchising Code

By Megan Teh, Lawyer, MST Lawyers and Raynia Theodore, Principal, MST Lawyers

On 10 November 2017, the Federal Court handed down a decision on the long-awaited case of ACCC v Morild Pty Ltd (Pastacup). This was the first proceeding initiated by the ACCC where they have sought penalties, declarations, injunctions and costs for breaches of the revised Franchising Code of Conduct which came into effect on 1 January 2015 (Code), making it a landmark case

The revised Code requires franchisors to provide a disclosure document to prospective franchisees which must contain, amongst other things, the relevant business experience of the franchisors officers.

 Background facts

Mr Bernstein co-founded the Pastacup franchise in 2008.  He had been a director of two previous franchisors of the Pastacup franchise system that had both became insolvent.

However, the franchisor Morild Pty Ltd (Morild) did not disclose this information in the disclosure document it provided to its prospective franchisees.

Court ruling

The Court held that this was relevant business experience and should have been disclosed to prospective franchisees in Morild’s disclosure document. In failing to do so, Morild had acted in breach of the Code (specifically for failing to create a compliant disclosure document and for providing a non-compliant disclosure document). Mr Bernstein was also found to be knowingly concerned in the breaches.

The Court granted injunctions against Morild and Mr Bernstein specifically requiring them to include in future disclosure documents the information which should have been included in its disclosure document. The injunctions were limited to a period of 10 years after the date of the relevant winding up of the previous franchisors to reflect the requirement in the Code that only the last 10 years of relevant business experience needs to be disclosed.

The Court also ordered Morild and Mr Bernstein to pay penalties of $100,000 and $50,000 respectively for their breaches as well as to pay the ACCC’s court costs.

Lessons to be learned

The Pastacup case highlights the importance of compliance with the disclosure obligations under the Code. This is especially important given that the ACCC has made it an enforcement priority to ensure that small businesses receive the protections provided by the Code.

If you are a franchisor, you must examine your current franchise documentation and existing practices to ensure that you are not at risk of breaching the Code. Notably, you must set out, amongst other required information, the relevant business experience of your officers in the disclosure document, bearing in mind that the term ‘officer’ is broadly defined and includes:

  • a director or secretary of the company; or
  • a person who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the company; or
  • a person who has the capacity to affect significantly the company’s financial standing; or
  • a person in accordance with whose instructions or wishes the directors of the company are accustomed to act (excluding advice given by the person in the proper performance of functions attaching to the person’s professional capacity or their business relationship with the directors or the company).

Franchisors are required to compile a list of all stakeholders in the franchisor company and determine whether or not they might be considered an ‘officer’ in the context of their roles and responsibilities in the company. If you are unsure whether a particular person is an officer, it is best to take a cautious approach and seek legal advice.

While it is important to ensure that your disclosure document complies with the Code, it is equally important to ensure that the contents do not convey a false or misleading impression. Liability for misleading and deceptive conduct (which is illegal under the Competition and Consumer Act 2010 (Cth)) can arise from not informing a franchisee of something they should be aware. For example, where a large number of franchises have closed, or a major litigation is initiated against the franchisor, disclosure should be made to a franchisee as this may influence their decision to acquire a franchise and enter into a franchise agreement. This is still the case even if the annual update of the disclosure document is not yet due.

Please do not hesitate to contact our Franchising Team by email or call +61 3 8540 0200 if you would like more information about your franchise system.