Misleading and deceptive conduct: the Franchisor will pay

By Stuart Jebb, Law Graduate, MST Lawyers

On 16 May 2014, in the case of ACCC v Taxsmart Group Pty Ltd [2014] FCA 487, the Federal Court of Australia ordered by consent that Taxsmart Group Pty Ltd, Taxsmart Franchising Pty Ltd and Resultsmart Pty Ltd (collectively referred to as “Taxsmart”) and its sole director, Mr Andrews repay $260,400 in franchise fees to five former Franchisees following proceedings commenced by the Australian Competition and Consumer Commission (ACCC).

Background

Taxsmart operated an accountancy business that provided tax agent services. In an effort to expand the business, Taxsmart decided to offer franchises to accounting graduates on the following terms:

1. The graduates would each pay an upfront franchise fee to Taxsmart;
2. the graduates would be employed by Taxsmart for a period of 12 months;
3. during the 12 months of employment, Taxsmart would provide the graduates with training, supervision and experience sufficient to enable them to obtain registration as a tax agent under the Tax Agent Services Act 2009 (Cth); and
4. once the graduates obtained registration as a tax agent, they would cease employment with Taxsmart and commence operation of a Taxsmart accountancy franchise.

In 2011, Taxsmart published advertisements online and sent emails to those who responded which conveyed that Taxsmart was offering a graduate program and 12 months employment to accounting graduates with no previous work experience in tax accounting that would enable such graduates to satisfy the requirements for registration as a tax agent and subsequently operate a Taxsmart franchise (“the Representation”).  

Eighteen people took up employment with, and agreed to pay franchise fees to Taxsmart, including five people who acted in reliance on the Representation.

Despite the Representation made by Taxsmart, the graduate program designed by Mr Andrews was not capable of enabling the graduates with no previous work experience in tax accounting to satisfy the legal requirements to become registered as a tax agent.

Consequently, the ACCC commenced proceedings against Taxsmart alleging that Taxsmart had engaged in misleading or deceptive conduct in relation to the Representation and therefore alleged a breached section 18 of the Australian Consumer Law. The ACCC also joined Mr Andrews to the proceedings alleging that he had aided, abetted, counselled or procured Taxsmart’s breach of the Australian Consumer Law.

The decision

Both Taxsmart and Mr Andrews each admitted that they engaged in conduct that contravened section 18 of the Australian Consumer Law. More specifically, Mr Andrews admitted that at the time that Taxsmart published the Representation, he knew what the requirements for registration as a tax agent were.

The Federal Court declared that Taxsmart had engaged in misleading or deceptive conduct when it represented that Taxsmart was offering a graduate program that would enable graduates with no experience to satisfy the requirements for registration as a tax agent. The Court also declared that Mr Andrews’ involvement amounted to conduct that aided and abetted Taxsmart in breaching the Australian Consumer Law.

Accordingly, the Court ordered that the franchise agreements with the Franchisees that relied on the Representation were void. Furthermore, Taxsmart and Mr Andrews were held to be jointly liable to pay the Franchisees the amount of loss or damaged they suffered by reason of the misleading and deceptive conduct, being the amount of the franchise and application fees previously paid.

Comments

This Federal Court decision gives another reminder that Franchisors must ensure that they have reasonable grounds for making a representation that is intended to encourage third parties to enter into franchise agreements.

With respect to Franchisor directors, the Federal Court decision also reaffirms that the actions of a director can not only result in corporate liability for a Franchisor under the Australian Consumer Law, but also their own personal liability. 

For further information, please contact John Sier in our Corporate Advisory and Franchising team on +61 3 8540 0200 or email the author of this article, Stuart Jebb.