Ironically Unclean: Ali v Australian Competition and Consumer Commission [2021] FCAFC 109

By Alicia Hill, Principal and Harrison Breer, Law Clerk

The case of Ali v Australian Competition and Consumer Commission [2021] FCAFC 109 (‘Ali v ACCC’) is an appeal concerning the appellants Ms Sanam Ali (‘Ali’) and Mr Charles Cameron (‘Cameron’) who were the sole shareholder/director and the national franchising manager of Geowash respectively. Geowash offered car wash franchises to interested parties in Australia. The Australian Competition and Consumer Commission (‘ACCC’) initially brought proceedings concerning various alleged misrepresentations and alleged unconscionable conduct, and alleged breach of the obligation of good faith in the Competition and Consumer (Industry Codes – Franchising) Rgulation 2014 (Cth) (‘Franchising Code of Conduct’). Ali and Cameron sought an appeal against these claims on 13 grounds but were ultimately unsuccessful.

Background:

Geowash advertised the opportunity to start a carwash business to interested parties for between $89,000 – $250,000 depending on the location and fit-out of the business. A prospective franchisee would receive a standard form franchise agreement and disclosure document, which explained that Geowash would charge the franchisee for the costs and expenses of establishing the site. However, Geowash dishonestly (through Ali and Cameron) intended to demand payments of around $35,000 after the signing of the contract in an upfront establishment fee, which was not calculated by reference to any contractual document, but rather by reference to half of what the franchisee was willing to invest (‘Charging Representation’). Ali and Cameron justified this payment, on the dishonest and false basis, that it was used for and calculated by the actual cost of developing the site for the franchisee. In reality, Ali and Cameron paid themselves “commissions”. Some of the sites were never constructed, and no accounting or reconciliation of costs of providing the sites were ever made. The ACCC alleged that a majority of the sites were never built but this was not proven.

The primary judge concluded that the demanded fees were dishonest and the system of obtaining large fees from the franchisees for use by was deceitful, unconscionable and in bad faith.

A subsequent judgement made declarations accordingly, and imposed penalties and a scheme for remedying third party loss set up under section 239 of the ACL.

Ali and Cameron sought an appeal (but not Geowash) from the orders of this judgement.

The Appeal:

The appellants, Ali and Cameron, brought an appeal on 13 grounds.

Ground 1 – Charging Representation:

The first ground of the appeal concerned the charging representation, although only to the extent of the primary judge applying it to all prospective franchisees bar two, instead of the claims that it amounted to misleading or deceptive conduct. There was a disagreement between the parties surrounding how many potential franchisees there were, with the appellants asserting there was 18 and the ACCC asserting there was 30. The primary judge only considered 18 franchisees and so it was unnecessary to consider this further. The appellants brought various criticisms against the primary judgement, including that there was no random sample of franchisees taken and so the evidence of the franchisees could not be extrapolated to those who did not give evidence.

The Court rejected this ground, on the view that the primary judge’s conclusions were based on the whole of the evidence, including that of Ali and Cameron. The Court held it was not improperly extrapolated without substantiating evidence, and that the primary judge had correctly weighed up the evidence and determined it was more probable than not that the charging representation was made to all franchisees except the two that had different evidence.

Grounds 2-8 – Unconscionability and breach of good faith:

The appellants raised 7 grounds of appeal relating to the finding of unconscionability and a breach of good faith by the primary judge.

Ground 2 challenged the extrapolation of the evidence to all potential franchisees in order to make out unconscionability. The Court held that the primary judge was correct in their ruling as they had all the evidence available to them and was able to determine a consistent pattern of conduct that was dishonest and that the overall “business model” was largely consistent in its methods of extracting money from the franchisees.

Ground 3 alleged that the primary judge had erred in finding that they had engaged in unconscionable conduct under s21 of the ACL and breached their obligation to act in good faith under clause 6 of the Franchising Code of Conduct. They also made various other claims in relation to this, such as dishonesty alone being insufficient to establish unconscionability. The Court rejected this ground, ultimately holding that their conduct was clearly unconscionable, and their reliance on grounds 2-8 for a claim against their breach of good faith was insufficient to make the Court disagree with the outcome of the trial judge.

Ground 4 argued that the primary judge erred in not providing proper weight to the uncontested evidence that Geowash operated in a competitive market, Geowash’s first franchise development was subject to a fixed price agreement although the costs of developing the property exceeded the fixed cost agreement, and so they changed their business model to undertake work internally, and that Geowash negotiated the purchase prices with prospective franchisees. The primary judge held that the price negotiation concerned what the prospective franchisee was willing to pay rather than a likely cost of the franchise to which the Court agreed. The Court rejected this ground of appeal and held that these claims did not address the dishonesty of the pattern of conduct. The Court was of the view that even though there was external competitive pressure, this was not a factor in how the purchase price was determined.

Grounds 5 and 6 argued that the primary judge erred in concluding that the Franchise Agreement or Disclosure Document created legal obligations on Geowash from using the money gained to general business costs of Geowash (including payments) and any restrictions on how the money obtained could be used. The Court held that the findings of misrepresentation and unconscionability concerned the dealings of Ali and Cameron with the franchisees, and not just the contractual documents. The Court agreed with the primary judge in that the representation that the payments were for the fit-out and set-up of a franchise was made by reference to the dealings, not the documents themselves. These grounds were ultimately rejected.

Ground 7 challenged the finding that the funds that should have been available for the fit-out costs were not available when they were required, which exposed the franchisee to risk of their money being taken and not receiving a franchise in the process, claiming that this was hypothetical and did not eventuate. Given that over 50% of Geowash’s total revenue between 2013-2015 was paid through commissions, the Court was of the view that the risk was clear, and that the franchisees risked not getting refunds when the amounts spent to fit-out and set-up their franchises were lower than the amounts paid. This ground was rejected.

Ground 8 argued that that their business model had been wrongly labelled as dishonest, based on their grounds raised above. This was ultimately because the ACCC had failed to set-up an outlet of a particular standard for comparison. The Court rejected this ground and held that the case concerned a pattern of conduct being dishonest through communication regarding the use of money, and therefore this ground lacks a foundation for an argument.

Grounds 9-13 – Penalties, consumer redress and excessive disqualification:

The appellants also challenged the penalties, orders for redress and amount of disqualification that they were charged with.

Ali and Cameron each argued that their penalties exceeded the statutory maximum under s 21 of the ACL for a system of unconscionable conduct and were overall excessive for their conduct. The Court was unwilling to alter the awarding of penalties, ultimately finding that the appellants had failed to come to grips with the findings and approach of the primary judge and failed to identify any error of principle sufficient to impugn a discretionary sentencing judgement.

With regards to the consumer redress orders, the appellants argued the order to create a trust fund was novel and beyond its power and the amount of funds to be contributed by each appellant was arbitrary, inappropriate and excessive. The Court ultimately rejected these grounds. The novelty of the trust fund order was determined not to be a defect, with the power only being confined by s 239 of the ACL. The Court held that the orders were “carefully crafted to fit the consequences of the systematic unconscionable conduct”, and so the ground of appeal was unsuccessful.

The final ground concerned the disqualification order that was passed down by the primary judge, arguing that it was excessive. The Court held that the appellants were merely attempting to downplay the seriousness of their dishonesty and actions, and that the primary judge was not too harsh in his order. Therefore, this ground also failed, and the disqualification periods of 5 years for Ali and 4 years for Cameron were upheld.

Conclusion:

All 13 grounds of appeal failed in this case, as the Court upheld the judgement of the primary judge. The orders of the primary judge were not disturbed.

Take-aways:

There are a variety of take-aways relevant to franchising from this case.

One take-away is the ability of the Court to draw inferences and ascertain patterns of conduct of a franchisor to its franchisees. This illustrates the importance of ensuring that each franchisee is treated correctly and properly, and the Court is well within its right to make orders for a number of franchisees if on balance the conduct is dishonest.

Secondly, the Court is willing to investigate the true purpose behind franchisee payments. In this case, the Court refuted the arguments raised by the appellants regarding competitiveness in the market and their issues with the fixed price model. The Court held that the ultimate purpose was to obtain as much funds as the prospective franchisee were willing to pay, to maximise their own personal benefits.

Finally, the Court will take into account the conduct of the franchisor when entering into the franchise agreement in determining what the legal obligations of the payments are to be used for. In this case, the conduct of Ali and Cameron was taken as part of the process in creating legal obligations for what the obtained funds was to be spent on.

For claimants for compensation or redress from dishonest franchisors the case also demonstrates the Court’s ability to provide monetary relief and recover some of the loss or damages suffered.

If you have any queries about any of the matters raised by this case, then please contact Alicia Hill on (03) 8540 0292 or alicia.hill@mst.com.au