FEDERAL COURT OF AUSTRALIA
Australian Competition and Consumer Commission v South East Melbourne Cleaning Pty Ltd (in liq) (formerly known as Coverall Cleaning Concepts South East Melbourne Pty Ltd) [2015] FCA 25
IN THE FEDERAL COURT OF AUSTRALIA | |
DATE OF ORDER: | |
WHERE MADE: |
THE COURT DECLARES THAT:
1. The First Respondent (Coverall) in trade or commerce:
(a) engaged in conduct that was misleading or likely to mislead and thereby contravened section 18 of the ACL; and
(b) made representations that were false or misleading in a material particular and concerned the profitability, risk or other material aspect of a business activity that Coverall invited other persons to engage or participate in, or to apply to engage or participate in, and that required the performance of work by other persons, or the investment of money by other persons and the performance by them of work associated with that investment, and thereby contravened section 37(2) of the ACL,
by:
(c) representing to Mr Salah Eliaser (Mr Eliaser) that if he purchased a franchise for a cost of $28,150, Coverall would provide him with work that would allow him to generate a minimum of $4,000 in revenue each month, when in fact Coverall did not have reasonable grounds for making this representation;
(d) further representing to Mr Eliaser that regardless of whether in fact Coverall provided him with sufficient work to earn him the minimum revenue each month, Coverall was obliged to and would pay him $4,000 each month, when in fact Coverall was not obliged to do so under its franchise agreement with him and Coverall did not have reasonable grounds for making this representation; and
(e) representing to Mr Hirenkumar Patel (Mr Patel) that if he purchased a franchise for a cost of $24,000, Coverall would provide him with work that would allow him to generate a minimum of $3,000 in revenue each month after 150 days, $4,000 in revenue each month after 180 days, and $5,000 in revenue each month after 210 days, and thereafter $5,000 in revenue every month until 24 months had elapsed, when in fact Coverall did not have reasonable grounds for making this representation; and
(f) further representing to Mr Patel that regardless of whether in fact Coverall provided him with sufficient work to earn him the minimum revenue each month, Coverall was obliged to and would pay him $3,000 each month after 150 days, $4,000 each month after 180 days, and $5,000 each month after 210 days, and thereafter $5,000 every month until 24 months had elapsed, when in fact Coverall was not obliged to do so under its franchise agreement with him and Coverall did not have reasonable grounds for making this representation.
2. Coverall contravened the Trade Practices (Industry Codes – Franchising) Regulations 1998 (Franchising Code), and thereby contravened section 51AD of the CCA, by:
(a) providing Mr Eliaser and Mr Patel with earnings information that was a projection or forecast when:
(i) the earnings information was not based on reasonable grounds; and
(ii) it failed to disclose the matters required to be disclosed by the Franchising Code; and
(b) entering into a franchise agreement with Mr Eliaser without first obtaining a signed statement, as required by the Franchising Code, that he had either been given advice about the agreement by an independent legal adviser, business adviser or accountant, or had been told that such advice should be sought but had decided not to seek it.
3. Coverall engaged in conduct in connection with the supply of rights associated with the operation of the Coverall Cleaning Concepts System franchise that was, in all the circumstances, unconscionable within the meaning of section 21 of the ACL, in relation to Mr Eliaser, by:
(a) failing to pay monies owed to Mr Eliaser when:
(i) Coverall was paid by the customers whom Mr Eliaser had serviced and retained the benefit of Mr Eliaser’s labour, causing him to suffer loss in breach of his franchise agreement;
(ii) Coverall knew that in order to service clients in Noble Park, Donvale and Camberwell, Mr Eliaser had to travel long distances from his home in Morwell and incurred costs in relation to this travel;
(b) charging Mr Eliaser a “sales and marketing fee” of $3,383.15 when:
(i) he had received no payment for work he had undertaken for the three months prior; and
(ii) the franchise agreement only allowed Coverall to charge this fee if Coverall had provided him with a gross volume of billings which amounted to $4,000 per month which Coverall had not done;
in circumstances in which Mr Eliaser had significantly weaker bargaining power than Coverall in that:
(c) Coverall was an experienced franchisor;
(d) Mr Eliaser was a first-time franchisee and was only twenty three years old with no business experience and limited ability to understand legal documents;
(e) Coverall, and not Mr Eliaser, had the right under the franchise agreement to collect money from customers;
(f) Coverall knew that Mr Eliaser had an incentive to continue to service Coverall’s customers despite Coverall not paying him, or not paying him on time, because he had assumed a significant liability in the form of the franchise fee and related “loan” to Coverall;
(g) Coverall knew that Mr Eliaser had not obtained independent legal, business or accounting advice;
(h) Coverall had failed to comply with the requirements of the Franchising Code, as described in paragraph 4 above; and
(i) Coverall had made the misrepresentations referred to in sub-paragraph 3(c) and 3(d) above which had the effect that Mr Eliaser was misled and misinformed about important matters concerning his rights under his franchise agreement.
4. Coverall engaged in conduct in connection with the supply of rights associated with the operation of Coverall Cleaning Concepts System franchise that was, in all the circumstances, unconscionable within the meaning of section 21 of the ACL, in relation to Mr Patel, by:
(a) failing to pay monies owed to Mr Patel when Coverall was paid by customers Mr Patel had serviced and retained the benefit of his labour, causing him to suffer loss in breach of his franchise agreement;
(b) telling Mr Patel that Coverall would demand payment of the ‘loan’ in respect of the balance of his franchise fee if he terminated his franchise with Coverall when Coverall was not entitled to that payment and when Coverall had failed to provide to him the benefit of the franchise agreement by failing to pay him and provide him with work as it was required to do;
(c) offering to release Mr Patel from his franchise agreement on terms that he pay Coverall $6,500 and release Coverall from the obligation to pay the money owed to him when Coverall had failed to provide to him the benefit of the franchise agreement by failing to pay him and provide him with work as it was required to do;
(d) engaging agents to demand payment of the ‘loan’ in respect of the outstanding balance of Mr Patel’s franchise fee, when Coverall had failed to deliver Mr Patel the benefit of the franchise agreement;
(e) insisting that if Mr Patel refused to accept work, the value of that work would be deducted from the value of the monthly amount of business that Coverall was obliged to provide to him, when Coverall had not paid him for work he had performed; and
(f) seeking from Mr Patel, if he refused work, a release in favour of Coverall in respect of all obligations, liabilities and claims when that release was not required by the franchise agreement between Coverall and Mr Patel,
in circumstances in which Mr Patel had significantly weaker bargaining power than Coverall in that:
(g) Coverall was an experienced franchisor;
(h) Mr Patel was a first-time franchisee;
(i) Coverall, and not Mr Patel, had the right under the franchise agreement to collect money from customers;
(j) Coverall knew that Mr Patel had an incentive to continue to service Coverall’s customers despite Coverall not paying him, or not paying him on time, because:
(i) he had assumed a significant liability in the form of the franchise fee and related ‘loan’ to Coverall which he had to service; and
(ii) if he refused to accept work from Coverall, his franchise agreement allowed Coverall to deduct the value of this work from the value of the monthly amount of work that Coverall was obliged to provide to him;
(k) Coverall knew that Mr Patel had not obtained independent legal, accounting or financial advice;
(l) Coverall had not provided Mr Patel with any earnings information about the franchise which was based on reasonable grounds such that he was not properly informed when he decided to enter his franchise agreement; and
(m) Coverall had made the misrepresentations referred to in sub-paragraph 3(e) and 3(f) above which had the effect that Mr Patel was misled and misinformed about important matters concerning his rights under his franchise agreement.
5. Each franchise agreement made between Coverall and:
(a) Salah Eliaser; and
(b) Hirenkumar Patel;
is void from the date of this declaration.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA | |
VICTORIA DISTRICT REGISTRY | |
GENERAL DIVISION | VID 399 of 2014 |
BETWEEN: | AUSTRALIAN COMPETITION AND CONSUMER COMMISSION Applicant |
AND: | SOUTH EAST MELBOURNE CLEANING PTY LTD (IN LIQUIDATION) (FORMERLY KNOWN AS COVERALL CLEANING CONCEPTS SOUTH EAST MELBOURNE PTY LTD) ACN 162 096 380 First Respondent BRETT JONES Second Respondent ASTRID HALEY Third Respondent |
JUDGE: | MURPHY J |
DATE OF ORDER: | 23 october 2014 |
WHERE MADE: | MELBOURNE |
UPON THE UNDERTAKING OF THE SECOND RESPONDENT, Brett Jones, that he will not, for a period of two years, be directly or indirectly involved in the management and/or marketing of a franchise business.
UPON THE UNDERTAKING OF THE THIRD RESPONDENT, Astrid Haley, that she will not, for a period of two years, be directly or indirectly involved in the management and/or marketing of a franchise business.
THE COURT DECLARES THAT:
1. The Second Respondent, Brett Jones, aided, abetted, counselled or procured and was directly and indirectly knowingly concerned in, and party to, the First Respondent’s (“Coverall”) contraventions of section 21 of the Australian Consumer Law (“ACL”) in Schedule 2 of the Competition and Consumer Act 2010 (Cth) (“CCA”) in respect of Mr Patel by:
(a) approving the withholding of payments from Mr Patel that Brett Jones knew Coverall was in fact obliged to pay him;
(b) telling Mr Patel that if he terminated his franchise agreement, Coverall would demand payment of the loan it had made to him in respect of the outstanding balance of the Mr Patel’s franchise fee (“Patel Loan”);
(c) approving Coverall’s offer to release Mr Patel from his franchise agreement on terms that he pay Coverall $6,500 and release Coverall from the obligation to pay the money owed to him when Brett Jones knew that Coverall had failed to provide to him the benefit of the franchise agreement by failing to pay him and provide him with work as it was required to do; and
(d) engaging agents to demand payment of the Patel Loan, when Brett Jones knew that Coverall had failed to deliver Mr Patel the benefit of the franchise agreement.
2. Brett Jones aided, abetted, counselled or procured and was directly and indirectly knowingly concerned in, and party to, Coverall’s contraventions of section 21 of the ACL in respect of Mr Eliaser by:
(a) approving the withholding of payments from Mr Eliaser that Brett Jones knew Coverall was in fact obliged to pay him; and
(b) approving Coverall charging Mr Eliaser a “sales and marketing fee” of $3,383.15 when Brett Jones knew that:
(i) Mr Eliaser had received no payment for work he had undertaken for the three months prior; and
(ii) the franchise agreement only allowed Coverall to charge this fee if Coverall had provided him with a gross volume of billings which amounted to $4,000 per month which Coverall had not done.
THE COURT ORDERS BY CONSENT THAT:
Disqualification
3. Pursuant to section 248(1) of the ACL, Brett Jones is disqualified from managing corporations for a period of 2 years commencing 30 days from the date of this order.
Pecuniary Penalties
4. Brett Jones must pay the Commonwealth of Australia a total pecuniary penalty of $30,000 in respect of his contraventions of section 21 referred to in declarations 1 and 2 above. This penalty is to be paid in 12 equal monthly instalments of $2,500 to be paid on the first Thursday of each month commencing on 4 February 2016.
Compensation
5. Brett Jones must pay:
(a) Mr Eliaser total compensation of $17,713.79 in 12 equal monthly instalments of $1,476.15 to be paid on the first Thursday of each month commencing on 5 February 2015; and
(b) Mr Patel total compensation of $5,604.65 in 12 equal monthly instalments of $467.05 to be paid on the first Thursday of each month commencing on 5 February 2015,
being the amount of loss or damage, suffered by them by reason of the contraventions referred to in declarations 1 and 2 above, comprising:
(i) the payment of the franchise fee under their franchise agreement with Coverall (“Coverall Franchise Agreement”); and
(ii) Coverall’s failure to remit to them money received by Coverall from customers as payment for services provided, contrary to clause 3.4 of their Coverall Franchise Agreement.
Costs
6. Brett Jones must pay $5,000 towards the Applicant’s costs of the proceeding in 12 equal monthly instalments of $416.67 to be paid on the first Thursday of each month commencing on 4 February 2016.
7. No other order as to costs.
Other Orders
8. A copy of the Reasons for Judgment, with the seal of the Court thereon, is to be retained in the Court for the purposes of section 137H of the CCA.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
VICTORIA DISTRICT REGISTRY | |
GENERAL DIVISION | VID 399 of 2014 |
BETWEEN: | AUSTRALIAN COMPETITION AND CONSUMER COMMISSION Applicant
|
AND: | SOUTH EAST MELBOURNE CLEANING PTY LTD (IN LIQUIDATION) (FORMERLY KNOWN AS COVERALL CLEANING CONCEPTS SOUTH EAST MELBOURNE PTY LTD) ACN 162 096 380 First Respondent BRETT JONES Second Respondent ASTRID HALEY Third Respondent
|
JUDGE: | MURPHY J |
DATE: | 29 JANUARY 2015 |
PLACE: | MELBOURNE |
REASONS FOR JUDGMENT
INTRODUCTION
1 The Australian Competition and Consumer Commission (“ACCC”) brought this proceeding against:
(a) the first respondent, South East Melbourne Cleaning Pty Ltd (In Liquidation) (“Coverall”), a cleaning franchise business formerly named Coverall Cleaning Concepts South East Melbourne Pty Ltd;
(b) the second respondent, Brett Darryl Jones, Coverall’s owner and sole director in the relevant period; and
(c) the third respondent, Astrid Susan Haley, Coverall’s Sales Manager at the relevant time.
2 The ACCC alleged that Coverall contravened ss 18, 21 and 37(2) of the Australian Consumer Law (“ACL”) being Schedule 2 to the Competition and Consumer Act 2010 (Cth) (“CCA”), as well as s 51AD of the CCA. Mr Jones and Ms Haley are alleged to have been accessories in Coverall’s contraventions.
3 In broad summary the ACCC alleged that in Coverall’s dealings with two of its franchisees, Salah Eldin Eliaser and Hirenkumar Ghanshyambai Patel, it:
(a) failed to comply with the Trade Practices (Industry Codes – Franchising) Regulations 1998 (“Franchising Code” or “the Code”) and thereby contravened s 51AD of the CCA, in that it failed to adhere to prescribed disclosure requirements prior to entering into franchise agreements with Mr Eliaser and Mr Patel respectively (the “Eliaser Agreement” and the “Patel Agreement”);
(b) contravened s 37 of the ACL being Schedule 2 to the CCA, in that it made false or misleading representations to Mr Eliaser and Mr Patel about the profitability, risk and other material aspects of the cleaning franchises in which Coverall invited them to engage or participate, by making representations that if Mr Eliaser and Mr Patel purchased a franchise:
(i) that Coverall would provide them with sufficient cleaning work to generate an agreed minimum monthly income for a defined period (“the initial business guarantee”) when in fact it did not have reasonable grounds for making such representations;
(ii) regardless of whether Coverall in fact provided them with sufficient cleaning work to generate the agreed minimum monthly income amounts, Coverall was obliged to and would pay them those amounts;
(c) engaged in misleading and deceptive conduct in breach of s 18 of the ACL by making the misleading representations to Mr Eliaser and Mr Patel;
(d) engaged in unconscionable conduct in breach of s 21 of the ACL in relation to Mr Eliaser and Mr Patel including by:
(i) withholding monies due to Mr Eliaser and Mr Patel, notwithstanding that it had been paid in full and substantially on time by the customers whose premises they cleaned, thereby retaining the benefit of their labour and causing them to suffer loss;
(ii) charging Mr Eliaser a sales and marketing fee when he had received no payment for the cleaning work he had undertaken in the three months prior, and when the franchise agreement only allowed the charging of such a fee when Coverall had provided work which generated a gross volume of billings of $4,000 per month, which it had not;
(iii) demanding payment of the balance of the franchise fee from Mr Patel if he terminated the franchise agreement, even though Coverall had failed to provide him with cleaning work and had failed to pay him for the work he had performed as it was required to do;
(iv) offering to release Mr Patel from his franchise agreement only if he paid Coverall $6,500, even though Coverall had failed to provide him with cleaning work and had failed to pay him for the work he had performed as it was required to do;
(v) engaging agents to demand payment of the balance of Mr Patel’s loan for his purchase of the franchise, notwithstanding that Coverall had failed to provide him with cleaning work and had failed to pay him for the work he had performed as it was required to do;
(vi) informing Mr Patel that if he refused to accept further cleaning work then the value of that work would be deducted from the value of the initial business guarantee, even though Coverall had failed to pay him for the work he had performed as it was required to do; and
(vii) notwithstanding that Coverall had failed to provide Mr Patel with work and failed to pay him as required, informing him that if he refused to perform further work, Coverall required a release in its favour in respect of all of its obligations, liabilities and claims when such a release was not required by the franchise agreement.
The ACCC alleged that Coverall deliberately exploited its significantly greater bargaining power in relation to Mr Eliaser and Mr Patel in order to gain an illegitimate advantage for itself.
4 The trial of the proceeding was fixed to commence on 22 October 2014. On 11 September 2014 Coverall resolved that it be voluntarily wound up. I granted leave for the ACCC to proceed against Coverall pursuant to s 500(2) of the Corporations Act 2001 (Cth) (“Corporations Act”). Coverall’s liquidators filed a submitting notice and took no part in the proceedings.
5 On the eve of trial the ACCC reached a settlement with Mr Jones and Ms Haley. The agreed relief contemplated, at least in part, that the ACCC would establish liability against Coverall. The ACCC and Mr Jones filed a joint Statement of Agreed Facts and Contraventions on 22 October 2014 (“Statement of Agreed Facts”) in which Mr Jones made admissions as to his conduct. The admissions although not made by Coverall itself also went to Coverall’s conduct.
6 On 22 October 2014, in broad terms, I made declarations that Coverall:
(a) engaged in misleading and deceptive conduct in breach of s 18 of the ACL;
(b) made false and misleading representations in breach of s 37(2) of the ACL;
(c) failed to comply with the Franchising Code and contravened s 51AD of the CCA; and
(d) engaged in unconscionable conduct in breach of s 21 of the ACL.
The declarations are attached to these reasons and I will not set them out in full.
7 On 23 October 2014 the ACCC, Mr Jones and Ms Haley proposed declarations and orders by consent in relation to Mr Jones’ contraventions. No orders or declarations were sought in relation to Ms Haley. Each of Mr Jones and Ms Haley provided an undertaking to the Court that they would not, for a period of two years, be directly or indirectly involved in the management and/or marketing of a franchise business.
8 On the basis of the evidence I made the declarations and orders that the parties sought, namely;
(a) declarations as to Mr Jones’ involvement in Coverall’s unconscionable conduct in breach of s 21 of the ACL;
(b) an order under s 248 of the ACL that Mr Jones be disqualified from managing corporations for a period of two years;
(c) an order that Mr Jones pay compensation of;
(i) $17,713.79 to Mr Eliaser; and
(ii) $5,604.65 to Mr Patel;
which is the amount of loss and damage they suffered by reason of the contraventions;
(d) an order that Mr Jones pay a pecuniary penalty of $30,000; and
(e) an order that Mr Jones pay $5,000 towards the ACCC’s costs of the proceeding.
9 I now provide my reasons. I thank the ACCC for its detailed written submissions, upon which I have directly drawn at various points.
THE FACTS
10 My factual findings are drawn from:
(a) affidavits by the following witnesses which were filed by the ACCC and accepted as read in Court:
(i) Mr Patel sworn 11 July 2014;
(ii) Timothy Alexander Hutton, a solicitor for the applicant, sworn 17 July 2014;
(iii) Mr Eliaser sworn 18 September 2014;
(iv) Dianna Kinski, Assistant Director of the ACCC, sworn 19 September 2014;
(v) John William Fogarty, a solicitor for the applicant, affirmed 10 October 2014;
(b) the Statement of Agreed Facts; and
(c) tendered documents.
The Coverall Business Model and its Franchise Agreements
11 From January 2013 until September 2014, Coverall operated a franchise business in commercial cleaning using what it described as the “Coverall System”. Pursuant to an agreement with Coverall Services Pty Ltd dated 1 March 2013 Coverall was licensed to franchise and sub-licence the use of the Coverall System and related intellectual property in parts of Victoria. Coverall sub-licensed the Coverall System in those areas by entering into franchise agreements with its own franchisees.
12 At all relevant times Coverall was a franchisor and Mr Eliaser and Mr Patel were prospective franchisees and then franchisees of Coverall. Coverall admitted that the Eliaser and Patel Agreements are franchise agreements within the meaning of the Franchising Code.
13 Coverall’s business had the following key elements:
(a) Coverall formed and maintained relationships with commercial businesses that required cleaning services (“customers”). It negotiated contracts with these customers and agreed the prices for cleaning services to be provided to them through Coverall;
(b) Coverall provided basic training to its franchisees, it provided them with a procedures manual and it required them to wear a Coverall uniform;
(c) Coverall’s franchisees provided the cleaning services to the customers that contracted to receive cleaning services from Coverall;
(d) Coverall’s franchisees had no direct contractual or other financial relationship with the customers;
(e) Coverall charged fees (including royalties) of 14% of the gross billings for the cleaning work undertaken by the franchisees to its franchisees which it deducted from the payments it collected from its customers before paying its franchisees;
(f) Coverall promised business and cash flow support to its franchisees. For a nominated up-front acquisition price paid by the franchisee, Coverall agreed to provide the franchisee with cleaning work which, for a fixed period, allowed the franchisee a guaranteed minimum monthly amount of gross billings (which I have called “the initial business guarantee”). These were known as “franchise plans”. For example, Mr Eliaser agreed to pay $28,150 for a “P4” franchise plan that Coverall represented would deliver cleaning work providing gross billings of $4,000 each month for the period covered by the guarantee. Coverall’s marketing material emphasised the importance of the guarantee to “protect” and “aid” franchisees in developing and stabilising their individual cleaning businesses; and
(g) to assist the franchisee to meet the upfront franchise acquisition cost Coverall was prepared to loan the franchise cost to franchisees, requiring 15% interest with monthly repayments deducted over the life of the loan.
The Eliaser and Patel Agreements
14 Reflecting these key elements of Coverall’s business, the Eliaser and Patel Agreements included the following terms:
(a) in consideration for Mr Eliaser and Mr Patel’s purchase of their franchises and the performance and observation of the covenants and conditions in the franchise agreements, Coverall granted each of them the right to use the Coverall System and related marks and allowed them to enjoy the rights and benefits accruing under their respective agreements (cl. 2.1);
(b) Mr Eliaser and Mr Patel would provide cleaning services to Coverall’s customers in accordance with prescribed procedures and standards (cll. 2.1 and 4);
(c) for a fixed period Coverall gave an initial business guarantee, agreeing to provide cleaning work to Mr Eliaser and Mr Patel each month which allowed them gross billings of $4,000 and $5,000 per month respectively (cl. 2.2);
(d) if Mr Eliaser or Mr Patel rejected an offer of cleaning work or ceased to provide cleaning services to a customer Coverall was deemed to have fulfilled its obligation to offer work to the monthly dollar volume of the rejected work (cl. 2.2.1);
(e) where a customer no longer required cleaning work to be provided by Coverall, and neither Mr Eliaser or Mr Patel was at fault for that lost work, Coverall agreed to replace the work within a reasonable time (cl. 2.2.2);
(f) the initial business guarantee was subject to Mr Eliaser and Mr Patel performing satisfactory inspections and submitting reports (cl. 2.2.2) (although the agreements did not specify, at least not unambiguously, how an adjustment to the guaranteed amount was to be made if the inspection and reporting criteria were not met);
(g) the amounts owing by Mr Eliaser and Mr Patel for their loans for the purchase price of the franchise were to be paid in equal monthly instalments with interest at 15% per annum (cl. 2.6.1);
(h) Coverall could offer additional cleaning work to Mr Eliaser and Mr Patel and demand a sales and marketing fee calculated in accordance with a prescribed formula (cl. 2.3);
(i) Coverall were to charge Mr Eliaser and Mr Patel ongoing fees including royalties of 14%, together with an “advertising fee” of up to 2% of each of Mr Eliaser and Mr Patel’s gross billings predicated on Coverall deciding that it was necessary to engage in more extensive advertising (cl. 2.6);
(j) Coverall were to exclusively perform all billing and accounting functions for cleaning services and supplies provided to customers by Mr Eliaser and Mr Patel (cl. 3.4);
(k) Coverall were to invoice customers and collect fees for the cleaning services provided by Mr Eliaser and Mr Patel each month. Then, upon Coverall’s receipt of payment by the customers, on the thirtieth day following the month in which the services were provided Coverall was to pay each of Mr Eliaser and Mr Patel the amounts due to them less amounts due to Coverall for its fees and royalties (cll. 3.4 and 3.5). While cll. 3.4 and 3.5 are not without ambiguity, on their proper construction Coverall was only required to remit payment to Mr Eliaser and Mr Patel once the customer was billed in respect of work done by the franchisee and once payment was received from the customer (less any permitted deductions for fees) and not in any case regardless of its receipt of the monies; and
(l) Coverall offered a “cash flow protection” service (cl. 3.5). Upon Mr Eliaser and Mr Patel making a request in writing Coverall could, in its discretion, decide to make cash flow advances to them (up to amounts equivalent to 60 days billings for any one customer and for a period of 90 days from the date on which the money was due to Coverall from the customer).
I note however that Coverall’s marketing material promoted its “cash flow protection” in more generous terms, stating:
We have implemented an advanced billing system to help protect your cash flow. On your behalf, your Coverall Regional Office… will generate and send invoices to your customer accounts each month. The following month, Coverall forwards a cheque to you for the work performed. This cash flow protection plan, as described in the Franchise Offering Circular, helps protect our franchise owners from some of the cash flow problems that can spell disaster for small companies. … [W]e want you to focus on providing excellence to your customers and help you avoid the problems of slow paying accounts.
15 The Eliaser and Patel Agreements were in identical terms except in respect of specific provisions such as the term of the agreement and the value of the initial business guarantee.
The facts regarding Mr Eliaser
16 Mr Eliaser was born in Sudan in 1990 and grew up speaking Nubian and Arabic. He moved to Australia at the age of 14 with his family. He finished his VCE in 2008. After leaving school he worked in supermarkets and also as a part-time security guard. He lives with his parents and seven siblings in Morwell, Victoria. The mortgage on the family home is in his name and he pays the mortgage as his parents are not employed.
17 He found Coverall by searching online for cleaning franchise opportunities and on about 30 August 2013 he went to Coverall’s office with his father to ask for information. He met with Ms Haley who gave him a document pack consisting of a pro-forma contract (a copy of which he later executed), a disclosure document under the Franchising Code, a copy of the Franchising Code and a Coverall brochure.
18 Importantly, Ms Haley also showed him a document titled “Coverall Australasia Franchise Plans” (“Franchise Schedule”) which set out the cost of each of the different franchise plans available from Coverall and the amount of “monthly initial business” which would be provided to the franchisee under each plan. Ms Haley explained to Mr Eliaser that the “monthly initial business” column in the Franchise Schedule showed how much he would get paid each month and the “total cost” column showed how much he would pay for that franchise.
19 At a subsequent meeting in early September 2013 Ms Haley again showed Mr Eliaser the Franchise Schedule. Mr Eliaser was interested in the “P4” franchise plan and he asked how he would get paid the balance of the monies due under that plan if Coverall failed to provide cleaning work at the “P4” level. Ms Haley said that in the event insufficient cleaning work was provided to meet the “P4” level Coverall would pay the difference between the work provided and the “P4” level until Coverall could find sufficient cleaning work to offer to him.
20 Mr Eliaser informed Ms Haley that he needed to work in the Morwell area and she said that Coverall would be able to find him work in that area.
21 He entered into the Eliaser Agreement with Coverall on 8 October 2013. To meet the deposit on the franchise acquisition cost Mr Eliaser paid $5,000 in cash which he borrowed through the Sudanese community and a further $3,000 borrowed from his mother. He entered a loan with Coverall for the balance of the $28,150 franchise purchase price. This was the first time he had purchased a franchise.
22 From October 2013 until April 2014, working as a Coverall franchisee, Mr Eliaser provided cleaning services to Coverall’s customers. Coverall was paid in full by its customers for those services and substantially on time. Despite this fact and despite Mr Eliaser’s repeated requests for payment, Coverall only paid Mr Eliaser for a small part for the work he performed and did not make regular monthly payments to him.
The cleaning services provided
23 Mr Eliaser provided the following cleaning services:
(a) from about 30 October 2013 to about 15 December 2013, he provided cleaning services three days a week to Next Level Fitness in Noble Park, for which it paid Coverall a total of $996.03;
(b) from about 8 November 2013 to about 15 December 2013, he provided daily cleaning services to BTYC Gymnastics in Donvale, for which it paid Coverall a total of $1,311.75;
(c) from about 8 November 2013 to about 15 December 2013, he provided cleaning services three days a week to Snap Fitness in Camberwell, for which it paid Coverall a total of $804.38;
(d) from about 3 January 2014 to about early April 2014, he provided cleaning services three days each week to Cargo Lounge in Traralgon, for which it paid Coverall a total of $1,951.98;
(e) from about 1 February 2014 to about 8 April 2014, he provided daily cleaning services to Traralgon Bowls Club in Traralgon, for which it paid Coverall a total of $10,237.29.
Payments made
24 Coverall only made two small payments to Mr Eliaser through the course of his franchise from October 2013 to April 2014. In or around early February 2014, Coverall paid Mr Eliaser $131.47 in part payment for his work in the period from 28 October 2013 to 31 December 2013, and on 28 March 2014 Coverall paid him a further $503.72. With the exception of these amounts Coverall did not pay Mr Eliaser any further amounts for the services he provided to Coverall’s customers in this period.
25 Coverall’s failure to make payments to Mr Eliaser in the full amount to which he was entitled and its failure to pay him on time were in breach of cll. 3.4 and 3.5 of the Eliaser Agreement. Mr Jones approved the payments Coverall made to Mr Eliaser and approved the amounts that it withheld from him.
Mr Eliaser’s requests for payment
26 As Mr Jones was aware, Mr Eliaser made repeated requests to Coverall seeking payment for the cleaning services he provided to:
(a) Next Level Fitness, BTYC Gymnastics and Snap Fitness in the period from 30 October 2013 until mid-December 2013; and
(b) Cargo Lounge and Traralgon Bowls Club in the period from January 2014 to April 2014.
27 Mr Jones knew that, in the period 28 October 2013 to 15 December 2013, in order to service Coverall’s customers Mr Eliaser was required to undertake a daily four hour round trip from his home in Morwell. He knew that in the period between about mid-November 2013 and early February 2014, Mr Eliaser made repeated requests of Coverall to provide him with work nearer to his home in the Morwell area because of the time, cost and inconvenience associated with such travel.
Sales and Marketing Fee charged
28 By letter dated 29 January 2014 Bill Lowrey of Coverall, as approved by Mr Jones, advised Mr Eliaser that Coverall:
(a) offered him cleaning work with Cargo Lounge and Traralgon Bowls Club to the value of $5,208.27;
(b) had charged him a sales and marketing fee of $3,383.15 (“Sales and Marketing Fee”) as a result of its provision of this work; and
(c) offered to accept the value of the cleaning work he had undertaken in November 2013 as full payment of that fee.
Mr Jones’ further knowledge
29 At all relevant times Mr Jones knew:
(a) the terms of the Eliaser Agreement;
(b) that because Coverall had not paid Mr Eliaser for all of the work he had done or paid him on time, even though it had been paid by the customers who Mr Eliaser had serviced, Coverall was retaining for itself the benefit of Mr Eliaser’s labour and causing him to suffer loss; and
(c) that by imposing the Sales and Marketing Fee on Mr Eliaser it was requiring him to comply with a condition that was not reasonably necessary for the protection of Coverall’s legitimate interests.
Mr Eliaser’s loss and damage
30 Mr Eliaser suffered loss and damage because of Coverall’s and Mr Jones’ conduct. He had made an $8,000 upfront payment to Coverall to purchase the franchise, which it had retained, and taken a loan for the balance of the $28,150 cost. Despite his performing the cleaning work required for which Coverall’s customers paid, it unlawfully withheld payments from him for cleaning services he had provided to the value of $9,713.79, as approved by Mr Jones.
The facts regarding Mr Patel
31 Mr Patel came to Australia from India in 2005 on a student visa. He was qualified in IT but was unable to find work in that field as his visa conditions did not permit him to work full time. In 2012 he became a permanent resident of Australia with his wife and children. He has worked in a variety of jobs, mostly in sales.
32 He was introduced to Coverall when he accompanied a friend to a meeting to discuss his friend’s proposed purchase of a Coverall franchise. Mr Patel was trying to save money to meet the significant costs of his mother’s Australian residency application, and was interested in undertaking cleaning work as a second job in the evenings.
33 In August 2013 Mr Patel met with Mr Jones on two occasions. On 17 August 2013 Mr Jones gave him a Coverall brochure, conducted a power-point presentation about Coverall and showed him the Franchise Schedule (in identical form to the schedule showed to Mr Eliaser). Mr Jones told him that the schedule demonstrated that a franchise plan that would earn the franchisee $2,000 a month cost $22,500 to purchase, and a franchise plan that would earn $3,000 a month cost $24,350 to purchase, and so on. Mr Patel said that he was interested in a “P5” franchise and Mr Jones informed him that this meant he was guaranteed to receive $5,000 a month.
34 In regard to the initial business guarantee Mr Jones said to Mr Patel words to the effect that “Coverall does not have to offer you work on the first day of you signing up. You need to wait until the “Initial Business” period of 150 days has finished before you ask for work. If we can provide you work earlier than that we will, but otherwise do not ask before the “Initial Business” period is over. In most cases we will be able to provide you with work before this time”.
35 Mr Patel entered into the Patel Agreement with Coverall on 31 August 2013. He purchased a “P5” franchise at a cost of $24,000 and paid a deposit of $2,500 with the balance of the $5,000 deposit being payable over the next three months. He entered into a $19,000 loan with Coverall to pay the balance of the franchise purchase price, which was repayable over a five-year term in monthly instalments of $452.01. This was the first time he had purchased a franchise.
36 From September 2013 until Coverall’s liquidation in September 2014, working as a Coverall franchisee, Mr Patel provided cleaning services to Coverall’s customers. Coverall was paid by its customers for those services but despite that fact and despite Mr Patel’s repeated requests for payment, Coverall only paid Mr Patel for a small part of the work performed and did not make regular monthly payments to him.
The cleaning services provided
37 Mr Patel provided the following cleaning services:
(a) from 2 September 2013 until 31 October 2013, he provided cleaning services four days a week to the Platinum Health Club in Hoppers Crossing, for which it paid Coverall a total of $1,716.00;
(b) from 6 September 2013 until 20 November 2013 he provided daily cleaning services to the Goodlife Health Club in Taylors Lakes, for which it paid Coverall a total of $6,165.32;
(c) from 6 September 2013 to 8 September 2013 he provided daily cleaning services to the Hog’s Breath CafÉ in Taylors Lakes, for which it paid Coverall $201.62; and
(d) from 25 October 2013 he provided cleaning services three times a week to Reward Distribution in Laverton North for which it paid Coverall a total of $5,058.25;
Payments made
38 Coverall made only the following three payments to Mr Patel through the course of the franchise from September 2013 to September 2014 when Coverall was wound up:
(a) on 13 December 2013 Coverall paid $1,050.12 for cleaning services he provided to Coverall customers in September 2013;
(b) on 30 April 2014 Coverall paid $577.17 for cleaning services he provided to Coverall customers in February 2014; and
(c) on 6 June 2014 Coverall paid $577.17 for cleaning services he provided to Coverall Customers in March 2014.
With the exception of these amounts Coverall did not pay Mr Patel in respect of the services he provided to Coverall’s customers.
39 Coverall’s failure to make payments to Mr Patel in the full amount to which he was entitled and its failure to pay him on time were in breach of cll. 3.4 and 3.5 of the Patel Agreement. Mr Jones approved the payments that Coverall made to Mr Patel and approved the amounts that it withheld from him.
Mr Patel’s requests for payment
40 From November 2013 Mr Patel made repeated requests to Coverall for payment including during a meeting with Mr Lowrey and Mr Jones at Coverall’s offices on 16 November 2013.
Offers of terms for Mr Patel to terminate the franchise
41 On 11 September 2013 Mr Patel received a ‘poor performance letter’ from Coverall stating that he had not provided satisfactory performance to the Hog’s Breath CafÉ. The letter stated that a complaint fee and a fee for Coverall’s costs would be deducted from the monies due to him, and that the Hog’s Breath business that had been lost would not be replaced by Coverall as part of the initial business guarantee made to him. However, in late September 2013 Mr Jones informed Mr Patel that Coverall accepted that the problems with Hog’s Breath CafÉ were not Mr Patel’s fault and that Coverall would not charge him the fees and would replace the Hog’s Breath business as part of the initial business guarantee.
42 On 16 November 2013, Mr Patel met with Mr Jones and Mr Lowrey at Coverall’s office and they informed him that Coverall’s loss of customers was not his fault and that it was at least in part caused by the poor management of client relationships by a Coverall employee whose employment Mr Jones had since terminated. At this meeting Mr Patel told Mr Jones and Mr Lowrey that he was worried about losing accounts due to no fault of his own when he was required to continue to pay off his $19,000 loan to purchase the franchise. Mr Patel asked Mr Jones what would happen if he terminated his franchise agreement and Mr Jones said that his loan would need to be repaid. Mr Jones said that if the franchise agreement was brought to an end Coverall would not be in a position to make any further payments to him for the cleaning work he had performed.
43 Mr Patel did not terminate the franchise and continued to provide cleaning services to Coverall customers.
The March 2014 proposal
44 As he was not being paid and was still paying off the loan for the franchise purchase, Mr Patel asked to be released from the Patel Agreement in about March 2014.
45 On 25 March 2014 Coverall offered to release Mr Patel from his obligations under the Patel Agreement only on terms that he pay Coverall $6,500 and release Coverall from its obligation to pay him the money that it owed for the cleaning work he had performed, which offer was approved by Mr Jones. Mr Patel did not accept the offer and continued to provide cleaning services to Coverall’s customers.
46 On 30 April 2014 Mr Lowrey told Mr Patel that Coverall was struggling to find money to pay him.
Coverall’s offers of work in 2014
47 Under the Patel Agreement, Coverall was required to provide Mr Patel with a minimum volume of cleaning work per month as follows:
(a) during March 2014, work that would generate a minimum of $3,000 in gross billings;
(b) during April 2014, work that would generate a minimum of $4,000 in gross billings;
(c) during May 2014, work that would generate a minimum of $5,000 in gross billings; and
(d) during June 2014 until September 2015, work that would generate a minimum of $5,000 in gross billings.
48 In breach of the agreement Coverall did not provide work to Mr Patel in the required volumes.
49 On 25 June 2014 Coverall proposed to Mr Patel that he provide cleaning services to a Coverall customer named Atomic Bar and requested him to visit the business with the intention that he would start to service Atomic Bar the following week. However Mr Patel informed Coverall that he would not accept the offer of work because:
(a) he had not been paid for the months of October, November, December 2013 and January 2014;
(b) he was owed approximately $4,564;
(c) there was no confirmed date by which he would receive payment nor any commitment by Coverall to pay him; and
(d) he doubted he would receive payment.
50 Coverall then provided Mr Patel with a “Customer Acceptance Form” on 26 June 2014 which stated that, as Mr Patel had chosen not to accept the offer of work at the Atomic Bar, he would not be provided with further cleaning work until he acknowledged in writing that he had refused this work and that the billing of the refused work would be subtracted from the initial business guarantee made to him.
51 The Customer Acceptance Form also contained a release by the franchisee in favour of Coverall in respect of all obligations, liabilities and claims up to the date of execution of the Form, excepting only Coverall’s prospective obligations under the franchise agreement.
Letter of demand of 10 September 2014
52 On or about 10 September 2014 Coverall engaged a debt collection agency, Stainsby Kelly and Associates (“SKA”), to collect loan instalment payments from Mr Patel which were allegedly overdue, as authorised by Mr Jones.
53 On 12 September 2014 Mr Patel received a letter of demand from SKA instructing him to immediately recommence making instalment payments of his loan with Coverall. The letter stated that SKA held standing instructions from Coverall to commence legal proceedings against him should he not comply.
Mr Jones’ further knowledge
54 At all relevant times, Mr Jones knew:
(a) that Mr Patel was a first time franchisee;
(b) the terms of the Patel Agreement;
(c) that Mr Patel had not received independent advice before entering into the Patel Agreement;
(d) that because Coverall had not paid Mr Patel for all of the work he had done or paid him on time even though it had been paid by the customers whose accounts Mr Patel had serviced, Coverall was retaining for itself the benefit of Mr Patel’s labour while causing him to suffer loss;
(e) that Coverall had not provided Mr Patel with the benefit of the Patel Agreement because it had not paid him for all of the work he had done or paid him on time, and from March 2014 it had not provided him with sufficient work to allow him to generate gross billings in the amount specified in the initial business guarantee.
Mr Patel’s loss and damage
55 Mr Patel suffered loss and damage because of Coverall’s and Mr Jones’ contraventions of the ACL. He had made an upfront payment of $5,000 to Coverall which it had retained and taken out a $19,000 loan for the balance of the franchise purchase price. Coverall continued to seek payment of the loan even though it had unlawfully withheld payments from Mr Patel for the cleaning services he had provided, as approved by Mr Jones.
PRINCIPLES REGARDING DECLARATIONS AND ORDERS BY CONSENT
56 Following its voluntary winding up Coverall took no active part in the proceeding and effectively submitted to the declarations and orders sought. The Court was required to decide the application on the basis of the pleadings and the evidence.
57 The position was different in relation to the declarations and orders against Mr Jones which are jointly proposed by the parties. Mr Jones admitted his conduct, admitted his involvement in Coverall’s contraventions of the CCA and consented to the declarations and orders sought which included a disqualification order and a pecuniary penalty.
58 It is, however, for the Court to decide whether Mr Jones’ conduct is in breach of the CCA as alleged and I must be satisfied that the consent declarations and orders are within the Court’s power and are appropriate in the circumstances of the case. Approval of settlements is consistent with the Court’s obligation to facilitate the just resolution of disputes according to law as quickly, inexpensively and efficiently as possible: ss 37M and 37N of the Federal Court of Australia Act 1976 (Cth) (“Federal Court Act”), but the benefits of efficient and timely resolution of enforcement proceedings do not absolve the Court from its responsibilities: Australian Competition and Consumer Commission v Real Estate Institute of Western Australia Inc (1999) 161 ALR 79 at [18] per French J.
59 Of course, provided that the Court performs its duty there are good public policy reasons for approving relief proposed by agreement. There is a public interest in exercising restraint in overly scrutinising proposed settlements so that settlements may be encouraged and so that potentially lengthy and expensive litigation may be avoided: Australian Competition and Consumer Commission v Pepe’s Ducks Ltd [2013] FCA 570 (“Pepe’s Ducks”) at [45] per Bromberg J. In Australian Competition and Consumer Commission v Energy Australia Pty Ltd [2014] FCA 336 at [149], Middleton J said, and I respectfully agree:
The acceptance of agreed penalty amounts (providing always that the court undertakes its duty to fix the appropriate penalty) increases the certainty of outcome for regulators and wrongdoers. This increases the predictability of outcomes for regulators and respondents and makes it more likely that proceedings will be resolved by agreement in an appropriate way and under the supervision of the court. This in turn improves deterrence by encouraging the implementation of corrective measures and freeing up the resources of the regulator.
60 In NW Frozen Foods Pty Ltd v Australian Competition and Consumer Commission (1996) 71 FCR 285 (“NW Frozen Foods”) at 291 per Burchett and Kiefel JJ (Carr J agreeing), the Full Court explained that where the parties have proposed agreed penalties the Court is not required to decide whether, absent the agreement, it would have imposed the same penalty. A proper figure is one which is within the permissible range in all the circumstances.
61 The parties’ agreement is also a relevant consideration in making consent declarations and orders because:
(a) the contravening party’s disposition to cooperate with the relevant authorities is a mitigating factor to be considered in the assessment of a penalty and may result in a reduction in the appropriate range of penalties imposed: NW Frozen Foods at 292; Trade Practices Commission v CSR Ltd [1991] ATPR 41-076 (“CSR”) at 52,152–3 per French J; and
(b) the ACCC is a specialist regulatory body and its view will be an important factor in the Court’s assessment: Australian Competition and Consumer Commission v Cabcharge Australia Ltd [2010] FCA 1261 at [42] per Finkelstein J.
62 I note however that in the circumstances of the present case there is no difficulty in making declarations of contravention against Coverall or in making the agreed declarations and orders in relation to Mr Jones’ involvement in Coverall’s unconscionable conduct. The effect of s 191 of the Evidence Act 1995 (Cth) (“Evidence Act”) is to admit the facts in the Statement of Agreed Facts as evidence. The Statement of Agreed Facts, combined with the affidavit evidence and the tendered documents, provided a strong evidentiary foundation for the declarations of contravention and orders made. The parties did not merely seek that the Court “rubber stamp” the settlement agreement.
63 I now turn to the alleged contraventions.
THE ALLEGED FAILURE TO ADHERE TO THE FRANCHISING CODE
64 The Franchising Code is a mandatory industry code for the purposes of Part IVB of the CCA. It is clear that in its dealings with franchisees and prospective franchisees Coverall’s conduct was regulated by the Code.
65 Section 51AD (as it was then numbered) of the CCA provides that “a corporation must not, in trade or commerce, contravene an applicable industry code”. The ACCC alleged that Coverall failed to comply with the Code, and was therefore in breach of s 51AD.
The alleged “disclosure document” breach
The requirement for a disclosure document
66 The Code requires that a franchisor must, before entering into a franchise agreement:
(a) create a disclosure document for the franchise in accordance with Division 2.1 of the Code (doing so in accordance with the form prescribed in Annexures 1 or 2 to the Code) (cl 6); and
(b) provide the disclosure document to prospective franchisees in the prescribed form (cl 6B).
67 Clause 6A of the Code provides that the purpose of such disclosure is to provide prospective franchisees with information from the franchisor so that the franchisee is well placed to make a reasonably informed decision about the franchise, as well as to give franchisees current information that is material to the running of the franchised business.
68 Clause 19 of Annexure 1 to the Code defines “earnings information” provided in a disclosure document to include information from which historical or future financial details of a franchise can be assessed, and states that any earnings information provided must be based on reasonable grounds.
69 Clause 19.5 provides that where the earnings information contains a projection or forecast the information provided must include:
(a) the facts and assumptions on which the projection or forecast was based;
(b) the extent of enquiries and research undertaken by the franchisor and any other compiler of the projection or forecast;
(c) the period to which the projection or forecast related;
(d) an explanation of the choice of the period covered by the projection or forecast;
(e) whether the projection or forecast included depreciation, salary for the franchisee and the cost of servicing loans; and
(f) assumptions about interest and tax.
Coverall’s disclosure document
70 Coverall admitted that it provided a disclosure document to each of Mr Eliaser and Mr Patel.
71 Its disclosure document asserted that Coverall did not provide “earnings information” about the franchise, that earnings may vary between franchises and that Coverall could not estimate earnings for a particular franchise. It described the information required to be provided by way of a projection or forecast as “not applicable”.
72 Contrary to Coverall’s assertion that it did not provide “earnings information” to either Mr Eliaser or Mr Patel, in my view it did. It provided them with the Franchise Schedule which set out the monthly earnings which would be generated for the franchisee under each of the different franchise plans offered by Coverall. This was “earnings information” as it indicated to Mr Eliaser and Mr Patel the monthly earnings under each available franchise plan from which they could assess the future financial details of the franchise.
73 The Franchise Schedule also contained a “projection or forecast” as defined in cl. 19.5 as it indicated how much monthly revenue each franchise plan was expected to generate for Mr Eliaser and Mr Patel.
74 Coverall was therefore required to provide further information to Mr Eliaser and Mr Patel, as prescribed in cl 19.5 (as set out at [69] above) which it did not. Amongst other things it did not provide the facts and assumptions on which the projected or forecast monthly earnings figures were based.
75 Finally, for the reasons I explain when dealing with the issue of Coverall’s misleading conduct, I am not satisfied that the forecast or projected monthly earnings in the Franchise Schedule were based on reasonable grounds.
76 I am satisfied that Coverall failed to comply with the Code and it contravened s 51AD of the CCA. I made declarations accordingly.
The alleged “independent advice” breach
The requirement for a signed statement by the franchisee regarding independent advice
77 Clause 11 of the Code requires that, before entering into a franchise agreement, the franchisor must receive a signed statement from the prospective franchisee:
(a) stating that the franchisee had received, read and understood the disclosure document; and
(b) acknowledging that the franchisee had been given advice about the proposed franchise agreement or franchised business by either an independent legal adviser, independent business adviser or independent accountant. Where such a statement is not received the franchisor is required to obtain from the prospective franchisee a signed statement that the franchisee had been told that that kind of advice should be sought, but the franchisee had decided not to seek it.
The signed statement from Mr Eliaser received by Coverall
78 When Mr Patel entered the franchise agreement with Coverall he provided a signed statement to the effect that he had been advised to seek advice from an independent legal advisor, business adviser or an accountant, but had decided not to do so. The ACCC made no complaint in relation to Mr Patel’s signed statement.
79 The position is different in respect to Mr Eliaser’s statement. Mr Eliaser said that at no time did Ms Haley or any other Coverall representative advise him to seek independent legal, accounting or other business advice in relation to his franchise agreement. He said that at a meeting on 8 October 2013 Ms Haley only asked him whether he had spoken with a lawyer or an accountant about the terms of the franchise agreement, and that he said that he had not done so.
80 Notwithstanding this, when Mr Eliaser entered the franchise agreement with Coverall he provided a signed statement that he:
(a) had been advised by Coverall to seek independent legal advice prior to signing the proposed franchise agreement;
(b) had sought advice from an independent legal advisor concerning the proposed franchise agreement; and
(c) had decided not to seek advice from an independent legal advisor, or an independent accountant concerning the proposed franchise agreement.
81 By accepting this confused and inconsistent statement from Mr Eliaser Coverall entered into the Eliaser Agreement without first obtaining a statement which was compliant with cl 11(2) of the Code. The unclear written statement that it accepted, together with the circumstances in which it was obtained, indicates that Coverall gave scant regard to the requirement that franchisees should be fully informed and given the opportunity to be independently advised before committing to the purchase of a franchise business.
82 I am satisfied that Coverall failed to comply with the Code and it contravened s 51AD of the CCA. I made declarations accordingly.
THE ALLEGED FALSE OR MISLEADING REPRESENTATIONS
83 In broad summary the ACCC alleged that Coverall:
(a) engaged in conduct that was misleading or likely to mislead in contravention of s 18 of the ACL by making misleading representations about the volume of cleaning work and the minimum amount of monthly earnings that Mr Eliaser and Mr Patel would each be paid; and
(b) made false and misleading representations concerning the profitability, risk and other material aspects of a business activity in contravention of s 37(2) of the ACL by making misleading representations about the volume of cleaning work and about the minimum amount of monthly earnings that Mr Eliaser and Mr Patel would each be paid.
Statutory framework
84 Section 18 of the ACL provides that “a person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.”
85 Section 37(2) of the ACL provides:
A person must not, in trade or commerce, make a representation that:
(a) is false or misleading in a material particular; and
(b) concerns the profitability, risk or any other material aspect of any business activity:
(i) that the person invites (whether by advertisement or otherwise) other persons to engage or participate in, or to offer or apply to engage or participate in; and
(ii) that requires the performance of work by other persons, or the investment of money by other persons and the performance by them of work associated with the investment.
86 Section 4(1) of the ACL provides that, where a person makes a representation as to a future matter and does not have reasonable grounds for making the representation, the representation is taken to be misleading. Section 4(2) imposes an evidentiary burden on a respondent in providing that, for the purposes of applying subs (1), the person making the representation is taken not to have had reasonable grounds for making the representation unless evidence is adduced to the contrary. If the respondent does not do so the representation will be taken to be misleading.
87 The allegations of breach of ss 18 and 37(2) largely overlap and I will deal with them at the same time. I respectfully adopt the observations of Allsop CJ in Australian Competition and Consumer Commission v Coles Supermarkets Australia Pty Ltd [2014] FCA 634 at [39]–[44] where his Honour said:
[39] Conduct is misleading or deceptive or likely to mislead or deceive if it has the tendency to lead into error, if there is a sufficient causal link between the conduct and the error on the part of the person exposed to the conduct. The causing of confusion or questioning is insufficient; it is necessary to establish that the ordinary or reasonable consumer is likely to be led into error.
[40] There is no meaningful difference between the words and phrases “misleading or deceptive” and “mislead or deceive” (s 18), “false or misleading” (s 29(1)(a)) and “mislead” (s 33).
[41] It is necessary to view the conduct as a whole and in its proper context. This will or may include consideration of the type of market, the manner in which such goods are sold, and the habits and characteristics of purchasers in such a market. The context will also include relevant disclaimers or explanations.
[42] In assessing advertising material, the “dominant message” of the material will be of crucial importance.
[43] Where conduct or representations is or are directed to members of the public at large, the conduct or representations must be judged by their effect on “ordinary” or “reasonable” members of the class of prospective purchasers. …
[44] Whilst the words and phrases “misleading or deceptive”, “mislead or deceive”, “false or misleading” and “mislead” are synonymous, the authorities reveal that a distinction is to be made between “likely to mislead or deceive” (in s 18) and “liable to mislead” (in s 33). The latter has been said to apply to a narrower range of conduct. [Citations omitted]
The alleged representations
Mr Eliaser
88 The ACCC alleged that:
(a) in a meeting at Coverall’s office on 30 August 2013 Ms Haley showed Mr Eliaser the Franchise Schedule and said to him words to the effect that “the “monthly initial business” column in the Franchise Schedule shows how much you will get paid each month and the “total cost” column shows you how much you must pay for this franchise”; and
(b) in a meeting at Coverall’s office in about early September 2013 Ms Haley said to Mr Eliaser words to the effect that “we will do our best to get you all the “P4” work but in the event that we cannot, we will pay you the difference until we find the extra work”;
and thereby represented to Mr Eliaser that:
(c) if he purchased a “P4” franchise at a cost of $28,150 Coverall would provide him with work that would allow him to generate a minimum of $4,000 in revenue per month (“Eliaser Monthly Earnings Representation”); and
(d) regardless of whether in fact Coverall provided him with the stipulated volume of work, Coverall:
(i) was obliged to pay him $4,000 every month (“First Eliaser Monthly Payment Representation”); and
(ii) would pay him the amount of $4,000 every month (“Second Eliaser Monthly Payment Representation”),
(together the “Eliaser Monthly Payment Representations”).
89 The relevant principles are well established and I need not set them out. I am required to determine:
(a) whether the pleaded representations were conveyed by the conduct described; and
(b) whether, as a matter of fact, the representations conveyed were false, misleading or likely to mislead.
90 I am satisfied that the pleaded representations were conveyed to Mr Eliaser by the natural and ordinary meaning of Ms Haley’s statements. Her words amplified the Franchise Schedule provided to him which was akin to a price list. In effect, the representation was that Mr Eliaser would receive a specified dollar value of monthly earnings in return for payment of a specified purchase price and the performance of the cleaning work.
91 Given Ms Haley’s position as Coverall’s Sales Manager which included dealing with prospective franchisees, I am satisfied that her conduct in making the pleaded representations was conduct within the scope of her actual or apparent authority as an employee of Coverall. It is deemed to be the conduct of Coverall pursuant to ss 84(2) and 139B of the CCA.
92 The evidence is clear that Mr Eliaser relied on these representations in making his decision to purchase the franchise. As I now explain, in my view the representations conveyed to him were false and misleading or likely to mislead.
93 The First Eliaser Monthly Payment Representation was false, and therefore misleading or likely to mislead, because Coverall was not in fact contractually obliged under the Eliaser Agreement to pay him $4,000 per month at any time. Properly construed the agreement only obliged Coverall to supply Mr Eliaser with a sufficient volume of cleaning work to enable him to generate gross revenue of $4,000 for a fixed period of 24 months, and only after a qualifying period of 180 days. The agreement did not oblige Coverall to pay Mr Eliaser $4,000 per month if Coverall’s customers did not pay it for the cleaning services he had performed. It is clear from Coverall’s dealings with Mr Eliaser (and with Mr Patel) that it intended and sought to enforce the contracts, and the character of the representation about Coverall’s obligation to Mr Eliaser is to be judged by reference to the Eliaser Agreement.
94 The Eliaser Monthly Earnings Representation and the Second Eliaser Monthly Payment Representation were representations as to a future matter, namely what Coverall would do during the course of the franchise relationship if Mr Eliaser purchased a franchise. There is no question that merely because a predicted state of affairs does not in fact come to pass does not make a representation misleading. The non-fulfilment of a promise when the time comes for performance does not of itself establish that the promisor had no or no adequate foundation for making the promise: see SPAR Licensing Pty Ltd v MIS QLD Pty Ltd (2014) 314 ALR 35 at [17]-[21] per Buchanan J and the authorities there cited. However, in the present case Coverall adduced no evidence as to the existence of reasonable grounds for making the representations which are the subject of the proceedings. Therefore ss 4(1) and (2) of the ACL operate so that the representations are taken to be misleading.
95 The ACCC relied on ss 4(1) and (2) and was not required to go further to make out its claim. But if it was necessary to go further, I would infer from the surrounding circumstances that there were not in fact reasonable grounds to expect that Coverall would be in a position to provide Mr Eliaser with sufficient cleaning work to generate the minimum monthly revenue represented or to pay him $4,000 every month.
96 I say this, firstly, because Ms Haley’s statements about the availability of work must be seen in the context that Mr Eliaser was seeking work in the Morwell area, and the evidence is that Ms Haley said that work could be found for him in that area within a matter of weeks. At the time Ms Haley made this statement Coverall had no customers in that area and its technique for attracting business was cold calling by a telemarketer. When it made the representation Coverall cannot have known how much work it would generate or when it could or would do so. Coverall’s lack of reasonable grounds for its promise may, to some extent, be inferred from the fact that between November 2013 and January 2014 Coverall provided Mr Eliaser with a volume of work that was far less than the volume promised, only a portion of which was in the Morwell area.
97 Secondly, for Coverall to have reasonable grounds for its representation that it would pay Mr Eliaser $4,000 every month it needed to have a source of funds sufficient to pay the promised amount, a business system capable of collecting payments from its customers and actually paying its franchisees on time, and a willingness to implement such a system and to pay franchisees in accordance with their entitlements under their franchise agreements.
98 The evidence is that Coverall’s customers paid in full for the cleaning work undertaken by both Mr Eliaser and Mr Patel and did so substantially on time. Despite this, Coverall paid Mr Eliaser very little of what he was due. He telephoned Coverall every week between December 2013 and July 2014 seeking payment of the monies owed to him but he went without payment from late 2013 to mid-2014. In response to his persistent requests Coverall never once suggested that it had not been paid by its customers or proffered any good reason why it had not or could not pay him.
99 In November 2013 Mr Jones and Mr Lowrey told Mr Patel (and another franchisee) that Coverall had lost customers due to no fault of Mr Patel’s (or the other franchisee). In December 2013 Mr Lowrey told Mr Patel that the money paid by the customers he had been servicing had been used for other business expenses. In April 2014 Mr Lowrey told Mr Patel that Coverall was struggling to find money to pay him. About five months later Coverall went into voluntary liquidation owing known creditors more than $172,000.
100 Coverall’s attitude to payment of its franchisees contrasted sharply with its promised advanced billing system and promised capacity to protect the cash flow needs of small franchisees such as Mr Eliaser. I am satisfied that during the entire period that Mr Eliaser and Mr Patel worked as Coverall franchisees Coverall did not have in place a business system capable of collecting payment and actually paying its franchisees on time, or it did not have a willingness to implement such a system and to pay franchisees in accordance with their entitlements. I infer that at the time Coverall made the relevant representations to Mr Eliaser those circumstances were no different which shows its lack of reasonable grounds.
101 I am also satisfied that the ACCC established each element necessary for a contravention of s 37(2) to be made out. Coverall invited Mr Eliaser to engage or participate in the franchise which required him to invest monies and perform work. Both the Eliaser Monthly Earnings Representation and the Eliaser Monthly Payment Representations concerned profitability, risk and other material aspects of Coverall’s business activity as they related to whether or not Mr Eliaser’s income was guaranteed.
102 By making the pleaded representations to Mr Eliaser Coverall engaged in conduct which was misleading or likely to mislead and made representations which were false or misleading in a material particular in contravention of ss 18 and 37(2) of the ACL. I made declarations accordingly.
Mr Patel
103 The ACCC alleged that in a meeting on 17 August 2013 Mr Jones showed Mr Patel the Franchise Schedule and:
(a) said words to Mr Patel to the effect that: “this document demonstrates the cost of the franchises available. A franchise that will earn you $2,000 per month costs $22,500; a $3,000 franchise costs $24,350; and so on”. Mr Jones said “How much do you want to earn per month?” and when Mr Patel responded by saying “P5”, Mr Jones said words to the effect “that’s $5,000 a month, guaranteed”; and
(b) With reference to cl 2.2 of the proposed franchise agreement, Mr Jones said to Mr Patel words to the effect that “Coverall does not have to offer you work on the first day of you signing up. You need to wait until the “Initial Business” period of 150 days has finished before you ask for work. If we can provide you work earlier than that we will, but otherwise do not ask before the Initial Business period is over. In most cases we will be able to provide you with work before this time”;
and thereby represented to Mr Patel that:
(c) if he purchased a franchise for a cost of $24,000, after a qualification period of 150 days Coverall would provide him with work that would allow him to generate a minimum of $3,000 in revenue each month; after 180 days a minimum of $4,000 in revenue per month and after 210 days and thereafter a minimum of $5,000 per month, every month until 24 months had elapsed (“Patel Monthly Earnings Representation”);
(d) regardless of whether in fact Coverall provided him with the stipulated volume of work, Coverall:
(i) was obliged to pay him a gross monthly amount of $3,000 after 150 days of Mr Patel commencing work as a Coverall franchisee, $4,000 after 180 days and a minimum of $5,000 after 210 days and thereafter to pay him a gross monthly amount of $5,000 every month until 24 months had elapsed (“First Patel Monthly Payment Representation”); and
(ii) would pay him a gross monthly amount of $3,000 after 150 days of Mr Patel commencing work, $4,000 after 180 days and a minimum of $5,000 after 210 days and would thereafter pay him a gross monthly amount of $5,000 every month until 24 months had elapsed (“Second Patel Monthly Payment Representation”),
(together the “Patel Monthly Payment Representations”).
104 I am satisfied that the pleaded representations were conveyed to Mr Patel by the natural and ordinary meaning of Mr Jones’ statements. Mr Jones’ words amplified the Franchise Schedule provided to him which was akin to a price list. In effect Mr Jones represented that Mr Patel would receive a specified dollar value of monthly earnings in return for payment of the specified prices to acquire a franchise and performance of the cleaning work provided.
105 Given his position as Coverall’s sole director and as its most senior manager I am satisfied that Mr Jones’ conduct in making the pleaded representations was conduct within the scope of his actual or apparent authority as an employee and officer of Coverall. It is deemed to be the conduct of Coverall pursuant to ss 84(2) and 139B of the CCA.
106 The evidence is clear that Mr Patel relied on the representations in making his decision to purchase the franchise. As I now explain, in my view the representations conveyed to him were false and misleading or likely to mislead.
107 The First Patel Monthly Payment Representation was false, and therefore misleading or likely to mislead, in the same way as the First Eliaser Monthly Payment Representation. Coverall was not in fact contractually obliged under the Patel Agreement to make monthly payments to Mr Patel regardless of whether it provided him with work. Rather, after the different qualifying periods, Coverall was obliged to supply work to him in a sufficient volume to enable him to generate the specified monthly gross billings within the specified periods. Coverall was not obliged to pay him the specified amounts per month if Coverall’s customers did not pay it for the cleaning services he had performed.
108 The Patel Monthly Earnings Representation and the Second Patel Monthly Payment Representation were misleading or likely to mislead for the same reasons as the corresponding representations made to Mr Eliaser. They were representations as to a future matter, namely what Coverall would do during the course of the franchise relationship if Mr Patel purchased a franchise, and Coverall adduced no evidence that the representation was based on reasonable grounds. The representations are therefore taken to be misleading by operation of ss 4(1) and (2) of the ACL.
109 It was unnecessary for the ACCC to go further to make out its claim, but if it was I would infer from the surrounding circumstances (to which I have already referred) that in fact Coverall did not have reasonable grounds to expect that it would be in a position to provide Mr Patel with cleaning work sufficient to generate the minimum monthly revenue represented, or to pay him the monthly earnings that it represented. It is worth remembering that between December 2013 and June 2014, Coverall only provided Mr Patel with work at a single business which allowed gross billings of $687.10 per month.
110 I am also satisfied that the ACCC established each of the elements necessary to show Coverall’s contravention of s 37(2). Coverall invited Mr Patel to engage or participate in the franchise which required him to invest monies and perform work. Both the Patel Monthly Earnings Representation and the Patel Monthly Payment Representations concerned risk or other material aspects of Coverall’s business activity as they related to whether or not Mr Patel’s income was guaranteed.
111 I am satisfied that by making the pleaded representations to Mr Patel Coverall engaged in conduct that was misleading or likely to mislead and made representations which were false or misleading in a material particular in contravention of ss 18 and 37(2) of the ACL. I made declarations accordingly.
THE ALLEGED UNCONSCIONABLE CONDUCT
112 The ACCC alleged that Coverall engaged in unconscionable conduct in relation to Mr Eliaser and Mr Patel within the meaning of s 21 of the ACL, and that Mr Jones aided, abetted, counselled or procured and was directly or indirectly knowingly concerned in, and party to this conduct.
Statutory framework
113 Section 21 of the ACL relevantly provides:
21 Unconscionable conduct in connection with goods or services
(1) A person must not, in trade or commerce, in connection with:
(a) the supply or possible supply of goods or services to a person (other than a listed public company); or
(b) the acquisition or possible acquisition of goods or services from a person (other than a listed public company);
engage in conduct that is, in all the circumstances, unconscionable.
…
(3) For the purpose of determining whether a person has contravened subsection (1):
(a) the court must not have regard to any circumstances that were not reasonably foreseeable at the time of the alleged contravention; and
(b) the court may have regard to conduct engaged in, or circumstances existing, before the commencement of this section.
(4) It is the intention of the Parliament that:
(a) this section is not limited by the unwritten law relating to unconscionable conduct; and
(b) this section is capable of applying to a system of conduct or pattern of behaviour, whether or not a particular individual is identified as having been disadvantaged by the conduct or behaviour; and
(c) in considering whether conduct to which a contract relates is unconscionable, a court’s consideration of the contract may include consideration of:
(i) the terms of the contract; and
(ii) the manner in which and the extent to which the contract is carried out;
and is not limited to consideration of the circumstances relating to formation of the contract.
114 Section 22 of the ACL sets out a non-exhaustive list of factors to which the Court may have regard in determining whether or not a person has engaged in unconscionable conduct. The section provides:
22 Matters the court may have regard to for the purposes of section 21
(1) Without limiting the matters to which the court may have regard for the purpose of determining whether a person (the supplier) has contravened section 21 in connection with the supply or possible supply of goods or services to a person (the customer), the court may have regard to:
(a) the relative strengths of the bargaining positions of the supplier and the customer; and
(b) whether, as a result of conduct engaged in by the supplier, the customer was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the supplier; and
(c) whether the customer was able to understand any documents relating to the supply or possible supply of the goods or services; and
(d) whether any undue influence or pressure was exerted on, or any unfair tactics were used against, the customer or a person acting on behalf of the customer by the supplier or a person acting on behalf of the supplier in relation to the supply or possible supply of the goods or services; and
(e) the amount for which, and the circumstances under which, the customer could have acquired identical or equivalent goods or services from a person other than the supplier; and
(f) the extent to which the supplier’s conduct towards the customer was consistent with the supplier’s conduct in similar transactions between the supplier and other like customers; and
(g) the requirements of any applicable industry code; and
(h) the requirements of any other industry code, if the customer acted on the reasonable belief that the supplier would comply with that code; and
(i) the extent to which the supplier unreasonably failed to disclose to the customer:
(i) any intended conduct of the supplier that might affect the interests of the customer; and
(ii) any risks to the customer arising from the supplier’s intended conduct (being risks that the supplier should have foreseen would not be apparent to the customer); and
(j) if there is a contract between the supplier and the customer for the supply of the goods or services:
(i) the extent to which the supplier was willing to negotiate the terms and conditions of the contract with the customer; and
(ii) the terms and conditions of the contract; and
(iii) the conduct of the supplier and the customer in complying with the terms and conditions of the contract; and
(iv) any conduct that the supplier or the customer engaged in, in connection with their commercial relationship, after they entered into the contract; and
(k) without limiting paragraph (j), whether the supplier has a contractual right to vary unilaterally a term or condition of a contract between the supplier and the customer for the supply of the goods or services; and
(l) the extent to which the supplier and the customer acted in good faith.
Relevant legal principles
115 In PT Ltd v Spuds Surf Chatswood Pty Ltd [2013] NSWCA 446 (“PT Ltd”) at [112] Sackville AJA (McColl and Leeming JJA agreeing) described the necessary steps for determination of whether conduct is unconscionable in the following terms:
(a) the correct principles of law governing a decision as to whether conduct is unconscionable must be stated;
(b) the court must find the primary facts on the basis of which the court makes its determination as to whether the impugned conduct was unconscionable;
(c) the court must decide whether, on the facts as found, the conduct should be characterised as unconscionable.
I respectfully agree.
116 Dealing first with the principles of law, amongst other things, the following matters underpin a proper approach to unconscionability under the ACL:
(a) The Court must first and foremost have regard to the language of the statute rather than judicial explanations of unconscionability: PT Ltd at [101]; Director of Consumer Affairs Victoria v Scully and Another (2013) 303 ALR 168 (“Scully”) at [45] per Santamaria JA (Neave and Osborn JJA agreeing).
(b) “Unconscionability” is not a term of art but simply means “something not done in good conscience”: Australian Competition and Consumer Commission v Lux Distributors Pty Ltd [2013] FCAFC 90 (“Lux”) at [41] per Allsop CJ, Jacobson and Gordon JJ; Scully at [36]; Australian Securities and Investments Commission v National Exchange Pty Ltd (2005) 148 FCR 132 at [33] per Tamberlin, Finn and Conti JJ.
(c) The court should have due regard to the remedial and beneficial objects of the legislation: Investec Bank v Naude [2014] NSWSC 165 (“Investec”) at [54] per McDougall J.
(d) The court must have regard to the non-exhaustive and non-prescriptive list in s 22(1) although the presence of one or more of these matters will not be determinative to an unconscionability enquiry: Scully at [41]. However these matters may nevertheless assist the court in illuminating the scope and meaning of unconscionable conduct: Scully at [42]; Body Bronze International Pty Ltd v Fehcorp Pty Ltd (2011) 34 VR 536 at [76] per Macaulay AJA (with whom Harper and Hansen JJA agreed).
(e) The court is not constrained by the general equitable concept of unconscionability although equity’s exploration of unconscionable conduct may assist the court: s 21(4)(a) ACL; Investec at [55]; Scully at [40].
(f) In determining unconscionability, the court is prevented from having regard to any circumstances that were not reasonably foreseeable at the time of the alleged contravention: s 21(3)(a) ACL.
(g) Whether or not conduct is unconscionable will depend on careful consideration of all of the conduct and involves standing back and looking at the whole episode: Lux at [44].
(h) The Court’s task involves evaluating conduct by reference to a normative standard of conscience which may develop and change over time and which must be understood and applied in the context in which the circumstances arise: Lux at [23] and [41]; Scully at [56].
(i) Notions of moral obloquy or moral tainting are relevant, but it must be recognised that it is conduct against conscience by reference to the norms of society that is in question: Lux at [41]. The task of statutory construction must focus on the text of the statute and a number of the factors in s 22 of the ACL do not necessarily involve dishonesty, sharp practice or conscious wrongdoing (eg s 22(1)(a), (b), (c), (e), (f), (h) and (j)). While conduct involving dishonesty, sharp practice or conscious wrongdoing is no doubt unconscionable, conduct which does not involve those factors may still be regarded as unconscionable. Substituting a test of “a high level of moral obloquy” for the standard of “unconscionability” is of doubtful assistance in determining whether the statutory prohibition has been contravened: PT Ltd at [101]-[106].
(j) As “unconscionability” in this context is predicated on “conduct”, a person’s conduct is to be distinguished from the consequences that that conduct may have on the lives of other people: Scully at [39]; Kakavas v Crown Melbourne Ltd (2013) 250 CLR 392 at [19] per French CJ, Hayne, Crennan, Kiefel, Bell, Gageler and Keane JJ.
(k) A determination of unconscionability involves a broadly based value judgment, applied to the facts on which reliance is placed, to the extent that they are proved: Investec at [59]; Lux at [23].
117 I note that:
(a) “conduct” is broadly defined in s 4(2) of the CCA and includes the doing or refusal to do any act;
(b) conduct will be “in trade or commerce” when it has a trading or commercial character: Kowalczuk and Another v Accom Finance Pty Ltd (2008) 77 NSWLR 205 at [188] per Campbell JA (Hodgson and McColl JJA agreeing);
(c) “in connection with” bears a broad meaning that should promote the purpose or object underlying s 21 in protecting businesses and consumers: Monroe Topple & Associates Pty Ltd v Institute of Chartered Accountants in Australia [2001] FCA 1056 at [255] per Lindgren J; and
(d) a “supply” of goods or services is not confined to a contractually based transaction but may include a course of dealing or proposed dealing: Ford Motor Co of Australia Ltd v Jefferson Ford Pty Ltd [2007] FCA 870 at [27] per Jessup J.
The facts
118 I have set out my view as to the facts at [10] to [55]. I have also set out my view as to Coverall’s breaches of the Franchising Code at [64]-[82] and as to Coverall’s misleading conduct at [83]-[111], and in doing so I elaborate on some of the facts. My findings as to Coverall’s unconscionable conduct (and as to Mr Jones’ involvement in that conduct) are based on these facts.
Was Coverall’s conduct unconscionable?
119 I now turn to deal with whether, on the evidence, Coverall’s conduct may be properly characterised as unconscionable.
120 It is plain that Coverall’s conduct was “conduct” for the purposes of s 4(2) of the ACL, in that it was carried out “in trade or commerce” and “in connection with” the supply of goods or services.
121 There is no question in my mind that Coverall was in a significantly stronger bargaining position than either Mr Eliaser or Mr Patel when negotiating their purchase of a franchise, or that it was in a much stronger position than them during the course of the franchise agreements. The ACCC alleged that, given the strength of Coverall’s position, it acted unconscionably in:
(a) failing to pay monies owed to Mr Eliaser when:
(i) Coverall was paid by the customers whom Mr Eliaser had serviced and retained the benefit of Mr Eliaser’s labour in breach of the Eliaser Agreement, causing him to suffer loss;
(ii) Coverall knew that in order to service clients in Noble Park, Donvale and Camberwell, Mr Eliaser had to travel long distances from his home in Morwell and suffered significant cost, lost time and inconvenience through this travel;
(b) charging Mr Eliaser the $3,383.15 Sales and Marketing Fee when:
(i) he had received no payment for work he had undertaken for the three months prior; and
(ii) the Eliaser Agreement only allowed Coverall to charge this fee if Coverall had provided him with a gross volume of billings which amounted to $4,000 per month, which it had not done;
(c) failing to pay monies owed to Mr Patel when Coverall had been paid by the customers that Mr Patel had serviced and had retained the benefit of his labour in breach of the Patel Agreement, causing him to suffer loss;
(d) telling Mr Patel that Coverall would demand payment of his loan to purchase the franchise with Coverall if he terminated his franchise, when Coverall was not entitled to that payment in circumstances where it had failed to provide him with the benefit of the Patel Agreement by failing to pay him and provide him with work as it was required to do;
(e) offering to release Mr Patel from the Patel Agreement on terms that he pay Coverall $6,500 and release Coverall from the obligation to pay the money owed to him when Coverall had failed to provide him with the benefit of the agreement by failing to pay him and failing to provide him with work as it was required to do;
(f) engaging agents to demand payment of the loan in respect of the outstanding balance of Mr Patel’s loan to purchase the franchise, when Coverall had failed to deliver him the benefit of the Patel Agreement;
(g) notwithstanding its failure to pay Mr Patel, insisting that if he refused to accept further work, the value of that work would be deducted from the value of the initial business guarantee that Coverall was obliged to provide to him, when Coverall had not paid him for work he had performed; and
(h) seeking from Mr Patel, if he refused work, a release in favour of Coverall in respect of all obligations, liabilities and claims when that release was not required by the Patel Agreement.
122 I am satisfied that Coverall’s conduct was as the ACCC alleged. By reference to the non-exhaustive list of factors in s 22 of the ACL:
(a) the relative strengths of the bargaining positions of the parties were manifestly unequal. Coverall had significant power over Mr Eliaser and Mr Patel’s interests as:
(i) Coverall was an experienced franchisor and both Mr Eliaser and Mr Patel were first time franchisees;
(ii) Coverall knew that Mr Eliaser and Mr Patel had not received any independent advice before entering into their franchise agreements. It took no steps to ensure that either of them understood the importance of independent advice or to ensure that they obtained such advice;
(iii) Mr Eliaser and Mr Patel were both first time franchisees and had a limited ability to understand legal documents in the absence of independent professional advice, which meant that they were unlikely to be able to properly understand and appreciate the terms of their respective franchise agreements;
(iv) Coverall made misrepresentations to Mr Eliaser and Mr Patel (as I have described) about significant matters under the franchise agreements which meant that they were misled and misinformed about their rights and obligations under their franchise agreements;
(v) Coverall was the source of Mr Eliaser and Mr Patel’s work, and it controlled the payment for the work they carried out because it collected the money paid by the customers. It was in a position of power in relation to those monies;
(vi) Mr Eliaser and Mr Patel had each committed to paying the substantial franchise purchase price and were required to make monthly instalment repayments of their loans at 15% interest. This meant that they had an incentive to keep working in the franchise even when they were not getting paid or not getting paid on time;
(vii) the terms of their franchise agreements allowed that if Mr Eliaser or Mr Patel refused offers of cleaning work, even if it was because they were not being offered cleaning work or being paid as required, Coverall could reduce their initial business guarantees;
(b) Coverall did not comply with the disclosure requirements in the Franchising Code. It failed to provide proper “earnings information” to both Mr Eliaser and Mr Patel to enable them to make a reasonably informed decision about their franchises, and it failed to ensure that Mr Eliaser was fully informed and given the opportunity to be independently advised before committing to the purchase of his franchise;
(c) in light of these matters (and particularly given that Mr Eliaser and Mr Patel were not provided with proper disclosure under the Code and were misled and misinformed by Coverall about important matters in relation to their franchise agreements) it employed unfair tactics against them in encouraging them to purchase a franchise;
(d) notwithstanding Coverall’s own documents acknowledging the importance of cash flow to the success of franchisees’ small cleaning businesses, Coverall failed to pay Mr Eliaser and Mr Patel for their work. It failed to pay them without any proper explanation in circumstances where it had been paid by the customers for the work performed and was obliged to pay them under their franchise agreements.
In all the circumstances Coverall did not act in good faith.
123 Standing back from Coverall’s conduct and looking at the entire episode in relation to each of Mr Eliaser and Mr Patel, Coverall encouraged each of them to purchase a franchise, but it did not properly disclose the “earnings information” in relation to the franchise, it misinformed them about the volume of cleaning work and amount of monthly earnings they could expect and about the risks and profitability of the franchise, and it entered into franchise agreements with them when it knew the matters set out above (as did its owner and sole director, Mr Jones). Coverall (or Mr Jones) took no steps to ameliorate the power imbalance between Coverall and Mr Eliaser and Mr Patel, to make proper disclosure of the earnings information or to provide accurate information as to the risks and profitability of the franchise they were being encouraged to enter. Then, despite the fact that Coverall had been paid by its customers for the services rendered by Mr Eliaser and Mr Patel, despite their repeated requests for payment, and despite its obligation to pay pursuant to their franchise agreements, during the course of the franchise Coverall took advantage of their significantly weaker position and refused and/or failed to pay them.
124 In respect to Mr Eliaser, Coverall refused to pay the monies due even though Mr Jones knew that to perform the cleaning work Mr Eliaser had to travel substantial distances from his home in Morwell and was incurring significant costs, lost time and inconvenience through this travel. Then, when Mr Eliaser had received no payment for work he had done for the three months prior, Coverall sought to charge Mr Eliaser a $3,383.15 Sales and Marketing Fee when it was not entitled to do so.
125 In respect to Mr Patel, notwithstanding that it had not paid him for the work he had performed, Coverall even insisted that, if he refused to accept further work, the value of the work would be deducted from the value of the initial business guarantee that Coverall was obliged to provide.
126 Notwithstanding that it had not paid him for the work he had performed, Coverall only offered to release Mr Patel from his franchise agreement on terms that were patently unreasonable in the circumstances. Effectively rubbing salt into his wounds, Mr Jones informed him that if he was to be released from the franchise agreement Coverall required that he pay it $6,500 and release it of all of its obligations and liabilities to him, including its obligation to pay the monies due to him for the cleaning work he had performed.
127 Coverall also told Mr Patel that if he sought to terminate his franchise Coverall would demand payment of the balance of the loan he had taken to purchase it, when Coverall was not entitled to do so. Coverall then engaged agents to demand payment of the outstanding balance of the loan.
128 The provisions of the Franchising Code are directed at ensuring that prospective franchisees are properly informed as to the financial prospects of franchise businesses which they are invited to enter, and the prohibitions on misleading representations in the ACL are directed at ensuring that prospective franchisees are not misinformed as to the profitability, risks and other material aspects of franchise businesses. Both point to a requirement that franchisors must act fairly and without misleading franchisees and prospective franchisees, must make proper disclosure to prospective franchisees, and must not take improper advantage of their weaker position. As the Full Court in Lux observed at [41], in determining whether conduct is unconscionable “[n]otions of justice and fairness are central, as are vulnerability, advantage and honesty.”
129 Coverall was in a significantly stronger bargaining position than Mr Eliaser and Mr Patel when agreeing their purchases of the franchises. As the party allocating the cleaning work to them and the party to whom customers made payment for the cleaning services provided, it was also in a much stronger position throughout the course of the franchises. At every step it sought to take advantage of its significantly stronger position and in my view its conduct was not just or fair. I consider that Coverall engaged in conduct towards both Mr Eliaser and Mr Patel that evinced an intentional or reckless disregard for appropriate norms or standards within society, which amounted to conduct that was unconscionable in all the circumstances: Lux at [23] and [41]; Scully at [56].
130 I have made declarations in respect of Coverall’s conduct accordingly.
Brett Jones
131 Mr Jones admitted that he aided, abetted, counselled or procured, and was directly and indirectly knowingly concerned in and party to Coverall’s contraventions of s 21 of the ACL in relation to Mr Eliaser and Mr Patel. However, as I have said, it is for the Court to decide whether his conduct is in breach.
132 To be liable for involvement in a contravention of the ACL a person must have intentionally participated in the contravention by positive conduct of some kind and have knowledge of its essential elements: Yorke v Lucas (1985) 158 CLR 661 at 670 per Mason ACJ, Wilson, Deane and Dawson JJ. It is not necessary that the accessory knows that the facts are capable of characterisation in the way expressed by the language of the statute (for example, that the conduct is “unconscionable” within the meaning of the ACL).
133 At all relevant times Mr Jones was the sole director of Coverall and effectively its owner. It was a small company and he was central to its operations. He was directly responsible within Coverall for:
(a) franchisee recruitment, new business customer contract development and meeting weekly with Coverall’s Sales Manager to discuss the number of cleaning proposals delivered to potential customers and the number of accounts and the dollar value of the proposals won by Coverall;
(b) administration and financial management, including invoicing of customers, conferring with Coverall’s accounts department with regard to the monthly collection of invoices and reviewing a Commonwealth Bank of Australia bank account into which Coverall’s customers made payments to Coverall and in respect of which he was at all relevant times an authorised signatory;
(c) customer service management; and
(d) personnel management, including perusal and approval of all letters sent to franchisees by the Business Development Manager.
134 He admitted that:
(a) he knew of the relevant terms of the Eliaser and the Patel Agreements;
(b) Coverall was paid by customers for the services provided by Mr Eliaser and Mr Patel, and despite the fact they each repeatedly sought payment from Coverall, it paid them only for part of the work they had done and did not pay them regularly;
(c) in his capacity as Coverall’s director he knew of the services provided by each of Mr Eliaser and Mr Patel, the payments made to them and their respective entitlements to payment;
(d) he knew that significant monies were owed to Mr Eliaser and Mr Patel;
(e) he approved the payments that Coverall made to Mr Eliaser and Mr Patel, and the withholding of payments from them even though Coverall was obliged to pay them;
(f) he knew that because Coverall had not paid Mr Eliaser and Mr Patel for the work they had done or not paid them on time when it had been paid by customers for that work, Coverall was retaining for itself the benefit of their labour while causing them to suffer loss;
(g) he approved Coverall charging Mr Eliaser a $3,383.15 Sales and Marketing Fee when he knew that:
(i) Mr Eliaser had received no payment for work he had undertaken for the three months prior; and
(ii) the franchise agreement only allowed Coverall to charge this fee if Coverall had provided him with a gross volume of billings which amounted to $4,000 per month which it had not done;
(h) he told Mr Patel that if he terminated his franchise agreement, Coverall would demand payment of the loan it had made to him to purchase the franchise;
(i) he approved Coverall’s offer to release Mr Patel from the Patel Agreement on terms that he pay Coverall $6,500 and release it from the obligation to pay the money owed to him when he knew that Coverall had failed to provide him with the benefit of the agreement by failing to pay him and provide him with work as it was required to do; and
(j) he engaged agents to demand payment of the loan for the purchase of the franchise from Mr Patel, when he knew that Coverall had failed to provide him with the benefit of the Patel Agreement.
135 Mr Jones’ admissions are evidence by virtue of s 191 of the Evidence Act. This evidence, together with the affidavits read by the ACCC and the documents tendered led me to be satisfied as to Mr Jones’ involvement in Coverall’s contravention of s 21 of the ACL. I made declarations accordingly.
RELIEF
Declarations
136 Coverall submitted to declarations in relation to its contraventions, and Mr Jones consented to declarations in relation to his contraventions.
137 There is no real question that the Court has power to make declarations in relation to the conduct of Coverall and Mr Jones. The considerations relevant to the exercise of discretion under s 21 of the Federal Court Act are well established. The discretion is a wide one: Ainsworth v Criminal Justice Commission (1992) 175 CLR 564 (“Ainsworth”) at 581 to 582 per Mason CJ, Dawson, Toohey, and Gaudron JJ; Tobacco Institute of Australia Ltd v Australian Federation of Consumer Organisations Inc (No 2) (1993) 41 FCR 89 (“Tobacco Institute”) at 97 to 98 per Sheppard J.
138 There is a question as to the proper approach to the proposed declarations by consent as the Court must be satisfied by evidence that it should make a declaration and will not ordinarily do so based only on the parties’ consent: Australian Competition and Consumer Commission v Skins Compression Garments Pty Ltd [2009] FCA 710 at [13] per Besanko J. But this is not an issue in the present case because, as I have said, the agreed facts are evidence by operation of s 191. In my view the affidavit evidence coupled with the agreed facts provided a strong evidentiary foundation for the declarations.
139 Declarations of contravention are appropriate in relation to Coverall and Mr Jones because, amongst other things:
(a) the questions are real rather than merely abstract or theoretical: Forster v Jododex Australia Pty Ltd and Another (1972) 127 CLR 421 (“Forster”) at 437-438 per Gibbs J; Ainsworth at 582 per Mason CJ, Dawson, Toohey and Gaudron JJ. The declarations identify and particularise the impugned conduct with precision.
(b) as the regulator the ACCC has a proper interest in seeking declarations against Coverall and Mr Jones: Forster at 437-438;
(c) Mr Jones had a true interest in opposing declarations and he is a proper contradictor: Forster at 437-438; Australian Competition and Consumer Commission v MSY Technology Pty Ltd (2012) 201 FCR 378 at [16] per Greenwood, Logan and Yates JJ;
(d) the declarations serve to vindicate the ACCC’s claims that Coverall and Mr Jones contravened the ACL, and will be of assistance to it in the future in carrying out its duties under the Act: Australian Competition and Consumer Commission v Goldy Motors Pty Ltd (2000) 23 ATPR 41-801 at [34] per Carr J;
(e) the contraventions are serious and declarations are appropriate to record the Court’s disapproval of the conduct: Tobacco Institute at 100; Australian Competition and Consumer Commission v Chen (2003) 132 FCR 309 (“Chen”) at [36] per Sackville J;
(f) the declarations may operate to inform other prospective franchisees of the dangers arising from the respondents’ contravening conduct: Chen at [48]; and
(g) the declarations may deter Mr Jones from a repetition of his contravening conduct and deter other franchisors (including other companies in the Coverall group) from similar conduct: Chen at [47]-[48].
140 I made declarations accordingly.
Undertaking
141 Mr Jones provided an undertaking to the Court that he will not, for a period of two years, be directly or indirectly involved in the management and/or marketing of a franchise business.
142 An undertaking is a formal promise to the Court to act or refrain from acting in a particular way, and breach of an undertaking may constitute contempt of court: Hamersley Iron Pty Ltd v National Competition Council (2008) 247 ALR 385 at [130]–[131] per Weinberg J. The content of an undertaking is not merely for the parties to decide: OD Transport Pty Ltd v WA Government Railways Commission (1987) 13 FCR 500 at 504-505 per French J.
143 I am satisfied that the undertaking provided by Mr Jones is appropriate. Its purpose is to restrain Mr Jones from involvement in the management and/or marketing of a franchise business for a period. He was responsible for managing Coverall’s franchise business and centrally involved in Coverall’s breaches of the Franchising Code, its misleading conduct and its unconscionable conduct. Notwithstanding that I have disqualified him from managing corporations for two years, his experience in franchising means that he could still play a role in other companies in the Coverall group or in other franchise businesses. The undertaking serves an important protective purpose in relation to other franchisees and prospective franchisees.
Disqualification
144 The ACCC sought, and Mr Jones consented to, an order disqualifying Mr Jones from managing corporations for a period of 2 years pursuant to s 248 of the ACL. Again, whether to impose disqualification, and if so for what period, is a matter for the Court.
145 Section 248 empowers the Court, upon the ACCC’s application, to make a disqualification order against Mr Jones if it is satisfied that he was involved in Coverall’s unconscionable conduct. The Court may have regard to any matters that the Court considers appropriate including the person’s conduct in relation to the management, business or property of any corporation.
146 The question of any disqualification order is to be decided before deciding on the imposition of a pecuniary penalty: Australian Securities and Investments Commission v Citrofresh International Ltd (ACN 064 551 426) and Another (No 3) (2010) 268 ALR 303 at [15] per Goldberg J; Rich v Australian Securities and Investments Commission (2004) 220 CLR 129 (“Rich”) at [45] per McHugh J; Australian Securities Commission v Forem-Freeway Enterprises Pty Ltd and Others (1999) 30 ACSR 339 at 349-350 per Madgwick J.
147 The principles informing the imposition of disqualification orders under analogous provisions in the Corporations Act are of utility when considering the same issue under the ACL: Australian Competition and Consumer Commission v Halkalia Pty Ltd (No 2) [2012] FCA 535 at [111] per Tracey J.
148 The judgment of Santow J in Re HIH Insurance (in prov liq) and HIH Casualty and General Insurance Ltd (in prov liq); Australian Securities and Investments Commission v Adler and Others (2002) 42 ACSR 80 (“Adler”) is accepted as a leading authority on the exercise of the Court’s discretion to grant disqualification orders: Rich at [48]. In Adler at [56], Santow J set out the following principles in relation to disqualification orders:
The cases on disqualification gave orders ranging from life disqualification to 3 years. The propositions that may be derived from these cases include:
(i) Disqualification orders are designed to protect the public from the harmful use of the corporate structure or from use that is contrary to proper commercial standards.
(ii) The banning order is designed to protect the public by seeking to safeguard the public interest in the transparency and accountability of companies and in the suitability of directors to hold office.
(iii) Protection of the public also envisages protection of individuals that deal with companies, including consumers, creditors, shareholders and investors.
(iv) The banning order is protective against present and future misuse of the corporate structure.
(v) The order has a motive of personal deterrence, though it is not punitive.
(vi) The objects of general deterrence are also sought to be achieved.
(vii) In assessing the fitness of an individual to manage a company, it is necessary that they have an understanding of the proper role of the company director and the duty of due diligence that is owed to the company.
(viii) Longer periods of disqualification are reserved for cases where contraventions have been of a serious nature such as those involving dishonesty.
(ix) In assessing an appropriate length of prohibition, consideration has been given to the degree of seriousness of the contraventions, the propensity that the defendant may engage in similar conduct in the future and the likely harm that may be caused to the public.
(x) It is necessary to balance the personal hardship to the defendant against the public interest and the need for protection of the public from any repeat of the conduct.
(xi) A mitigating factor in considering a period of disqualification is the likelihood of the defendant reforming.
(xii) The eight criteria to govern the exercise of the court’s powers of disqualification set out in Commissioner for Corporate Affairs v Ekamper (1987) 12 ACLR 519 have been influential. It was held that in making such an order it is necessary to assess:
• Character of the offenders;
• Nature of the breaches;
• Structure of the companies and the nature of their business;
• Interests of shareholders, creditors and employees;
• Risks to others from the continuation of offenders as company directors;
• Honesty and competence of offenders;
• Hardship to offenders and their personal and commercial interests; and
• Offenders’ appreciation that future breaches could result in future proceedings:
(xiii) Factors which lead to the imposition of the longest periods of disqualification (that is disqualifications of 25 years or more) were:
• Large financial losses;
• High propensity that defendants may engage in similar activities or conduct;
• Activities undertaken in fields in which there was potential to do great financial damage such as in management and financial consultancy;
• Lack of contrition or remorse;
• Disregard for law and compliance with corporate regulations.
• Dishonesty and intent to defraud;
• Previous convictions and contraventions for similar activities:
(xiv) In cases in which the period of disqualification ranged from 7 years to 12 years, the factors evident and which lead to the conclusion that these cases were serious though not “worst cases”, included:
• Serious incompetence and irresponsibility;
• Substantial loss;
• Defendants had engaged in deliberate courses of conduct to enrich themselves at others’ expense, but with lesser degrees of dishonesty;
• Continued, knowing and wilful contraventions of the law and disregard for legal obligations;
• Lack of contrition or acceptance of responsibility, but as against that, the prospect that the individual may reform:
(xv) The factors leading to the shortest disqualifications, that is disqualifications for up to 3 years were:
• Although the defendants had personally gained from the conduct, they had endeavoured to repay or partially repay the amounts misappropriated;
• The defendants had no immediate or discernible future intention to hold a position as manager of a company;
• In Donovan’s case, the respondent had expressed remorse and contrition, acted on advice of professionals and had not contested the proceedings.
[Citations omitted.]
149 I note that, following the decision in Rich at [53] and contrary to principle (v) identified by Santow J, the objective of a disqualification order can no longer be characterised as purely protective. It is now clear that disqualification orders may also be imposed for the objectives of punishment and deterrence: Australian Securities and Investments Commission v Healey (No 2) (2011) 196 FCR 430 at [109] per Middleton J; Australian Securities and Investments Commission v Lindberg (2012) 91 ACSR 640 at [81] per Robson J; Australian Securities and Investments Commission v Vizard (2005) 145 FCR 57 at [35] per Finkelstein J. The need for general and specific deterrence is a central consideration in relation to whether to impose a disqualification order and if so for what period: Elliott v Australian Securities and Investments Commission and Another (2004) 10 VR 369 at [137] per Warren CJ, Charles JA and O’Bryan JA.
150 I consider that a disqualification order is appropriate, first, because of the nature and seriousness of Mr Jones’ contraventions. His conduct involved serious and deliberate conduct in contravention of the ACL, a disregard for Coverall’s and Mr Jones’ legal obligations, and it caused significant financial harm to Mr Eliaser and Mr Patel. In my view his conduct was seriously unfair, unjust and exploitative. He showed a complete disregard for Mr Eliaser and Mr Patel’s rights and interests and he employed unfair tactics in his dealings with them in order to preserve Coverall’s interests at their expense.
151 Although the sums of money that Coverall withheld are not large in an overall commercial context they were of significance to Mr Eliaser and Mr Patel, who are ordinary working men. Each paid a deposit which was sizeable for him and each took on a substantial loan in order to purchase a Coverall franchise, each performed all the cleaning work that was required of him over a lengthy period (for which work Coverall’s customers paid it), yet Mr Jones approved Coverall’s refusal to pay them most of the monies due. Mr Jones approved Coverall’s retention of the deposits, approved its withholding payments due to Mr Eliaser and Mr Patel, approved the imposition of the Sales and Marketing Fee on Mr Eliaser, sought to have Coverall released from any obligation to pay Mr Patel the monies due, and approved Coverall’s demands for payment of the balance of Mr Patel’s loan, in circumstances in which Coverall had failed to perform its obligations under the franchise agreements. I note also that his approval of the demand for payment of the balance of Mr Patel’s loan was made only days before he resolved to appoint liquidators to wind up Coverall.
152 Mr Jones’ conduct also reflected a lack of understanding of the proper role of a company director in relation to the legal obligation owed by a franchisor to its franchisees, as the conduct involved:
(a) a failure to remit payments to franchisees that Coverall had collected for services the franchisees had provided to its customers, which payments it was obligated to make; and
(b) making demands for payment of the balance of Mr Patel’s loan for his franchise acquisition in circumstances in which Coverall had failed to make payments owed to him and within days of resolving to appoint liquidators to wind up the company.
153 It is relevant to disqualification that Mr Jones is an officer of two other companies in the Coverall group. He has been a director and company secretary of:
(a) North West Sydney Cleaning Pty Ltd since 7 August 2012, (until 25 August 2014 known as Coverall Cleaning Concepts North West Sydney); and
(b) Coverall Brisbane Pty Ltd since 4 July 2013.
While there is no evidence that these other companies have acted in the same way as Coverall they are part of the same corporate group, and I infer that they all use the Coverall System in their franchising. Although his undertaking significantly ameliorates it, there remains a risk that if he is not disqualified Mr Jones may commit similar contraventions through his involvement in these other Coverall companies. The fundamental objective to protect the public, and in particular other franchisees and prospective franchisees, indicates a need to disqualify him.
154 A disqualification order is required so as to meet the plain legislative intent that prospective franchisees are properly informed as to the profitability, risks and other material aspects of a franchise. Because franchisors are usually in a much stronger bargaining position, it is of central importance that other directors of franchise companies are made to understand that they must properly inform and not mislead prospective franchisees, must honour their obligations to the franchisees in the operation of the franchise, and must not misuse their much stronger position to treat franchisees unfairly, unjustly or unethically.
155 Given the seriousness of the contraventions it might be said that a disqualification order longer than two years is appropriate, and I note that Mr Jones’ misconduct does not readily fit within the shortest period of disqualification referred to by Santow J. However, the principles set out by Santow J are just guidelines and each case must turn upon its own considerations: Australian Securities and Investments Commission v Beekink and Others (2007) 238 ALR 595 at [112] per Mansfield, Jacobson and Siopis JJ.
156 In the finish I am satisfied that a disqualification order for two years is within the permissible range and is sufficient in the circumstances, because:
(a) Mr Jones has cooperated with the ACCC by reaching settlement of the proceeding against him;
(b) his cooperation has spared the ACCC and the Court significant resources;
(c) he has not previously been found to have contravened the ACL or the CCA;
(d) the disqualification period will result in hardship to him as he will be required to cease his directorship of the other two Coverall companies; and
(e) he has provided a formal undertaking to the Court that for a period of two years he will not be directly or indirectly involved in the management and/or marketing of a franchise business.
I have made a disqualification order accordingly.
Compensation order
157 Section 237 of the ACL provides that the Court may make compensatory orders for contraventions of the ACL. Mr Jones consented to a compensation order but, again, this is a matter for the Court.
158 The power of the Court to make a compensation order is predicated upon a person suffering loss or damage, or being likely to suffer loss or damage by the conduct of a respondent: I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2002) 210 CLR 109 (“I & L Securities”) at [20] per Gleeson CJ. The conduct of the respondent need not be the sole cause of the loss or damage sustained and it is enough to demonstrate that the contravention was a cause of the loss or damage sustained: I & L Securities at [57] per Gaudron, Gummow and Hayne JJ.
159 I am satisfied on the evidence that Mr Jones’ conduct caused loss or damage to Mr Eliaser and Mr Patel because:
(a) they paid deposits on the purchase price of their Coverall franchise to it which Coverall retained; and
(b) Coverall failed to remit to them the monies it received from its customers as payment for cleaning services they provided.
160 There is detailed evidence before the Court as to the quantum of Mr Eliaser and Mr Patel’s loss or damage, and Mr Jones accepted this evidence. Without descending to the minutiae of the evidence, I am satisfied that the conduct of Coverall and Mr Jones has caused loss and damage to Mr Eliaser in the sum of $17,713.79, and to Mr Patel in the sum of $5,604.65. I am so satisfied on the basis that the Eliaser and Patel Agreements are now treated as being of no effect (as I have declared) and that Mr Eliaser and Mr Patel have no outstanding financial obligations to Coverall.
161 In view of his limited financial resources the parties agreed, and I accept, that Mr Jones be allowed 12 months to pay the compensation ordered by monthly instalments.
162 I made orders that Mr Jones pay:
(a) Mr Eliaser total compensation of $17,713.79 in 12 equal monthly instalments of $1,476.15 to be paid on the first Thursday of each month commencing on 5 February 2015; and
(b) Mr Patel total compensation of $5,604.65 in 12 equal monthly instalments of $467.05 to be paid on the first Thursday of each month commencing on 5 February 2015.
Pecuniary penalty
163 Section 224 of the ACL provides for the imposition of pecuniary penalties where the Court is satisfied that a person has contravened s 21 of the ACL. Mr Jones consented to the imposition of a pecuniary penalty of $30,000 for his involvement in Coverall’s unconscionable conduct but, as I have said, the imposition of a penalty is a matter for the Court.
164 Section 224(2) relevantly provides:
In determining the appropriate pecuniary penalty, the court must have regard to all relevant matters including:
(a) the nature and extent of the act or omission and of any loss or damage suffered as a result of the act or omission; and
(b) the circumstances in which the act or omission took place; and
(c) whether the person has previously been found by a court in proceedings under Chapter 4 or this Part to have engaged in any similar conduct.
165 In addition to these mandatory factors a number of other factors may be relevant in relation to personal (as distinct from corporate) respondents including:
(a) the deliberateness of the contravention and the period over which it extended;
(b) whether the respondent has shown disposition to cooperate with the authorities responsible for the enforcement of the CCA;
(c) whether the respondent has engaged in similar conduct in the past;
(d) the respondent’s financial position; and
(e) whether the conduct was systematic, deliberate or covert.
See CSR at 52,152 – 52,153; NW Frozen Foods at 292; Australian Competition and Consumer Commission v TPG Internet Pty Ltd (No 2) [2012] FCA 629 at [61].
166 In Registrar of Aboriginal and Torres Strait Islander Corporations v Matcham (No 2) (2014) 97 ACSR 412 (“Matcham (No 2)”) at [234] Jacobson J explained that the question of a pecuniary penalty in that case called for attention to the six factors set out in CSR at 51,152 per French J together with a factor listed in Adler. Jacobson J listed the relevant factors as follows:
(1) The first is the nature and extent of the contravening conduct, including the length of time over which it extended, the number of payments obtained and the amounts in question.
(2) The second is the loss and harm arising from the conduct, including the charitable nature of the corporation, the public purposes it was intended to serve and the lost opportunities to provide health care for disadvantaged Indigenous persons.
(3) The third is the circumstances in which the conduct took place, including the position held in the corporation by the contravener and the degree of dishonesty or carelessness involved in the corporation.
(4) The fourth is any relevant matters personal to the contravener, such as hardship…
(5) The fifth is any steps taken to rectify the harm caused by the wrongdoing.
(6) The sixth is any [contrition] or cooperation with the authorities.
(7) Another factor identified by Santow J in Adler (No 1) at [126](iv) was the consequences of an associated disqualification order made against a defendant.
I respectfully take the same approach.
167 I have already set out my views as to the nature and seriousness of Mr Jones’ contravention, and the loss and damage suffered by Mr Eliaser and Mr Patel. I will not reiterate those views. The seriousness of his breach strongly indicates a need for a pecuniary penalty.
168 Deterrence, both specific and general, is a fundamental objective of pecuniary penalties under s 224 of the ACL: Australian Competition and Consumer Commission v TPG Internet Pty Ltd (2013) 250 CLR 640 at [65]-[66] per French CJ, Crennan, Bell and Keane JJ with Gageler J agreeing. In CSR at 52,152, French J stated that the objective of the civil penalty regime under the Trade Practices Act 1974 (Cth) was to:
…put a price on contravention that is sufficiently high to deter repetition by the contravener and by others who might be tempted to contravene the Act.
169 The requirement for general and specific deterrence indicates the need for a pecuniary penalty which operates to ensure that other directors of franchise companies understand that they must properly inform and not mislead prospective franchisees as to the profitability, risk and other material aspects of the franchise business, must honour their obligations to franchisees in the operation of the franchise, and must not misuse their much stronger position to treat franchisees unfairly, unjustly or unethically.
170 The maximum penalty under s 224(3) is $220,000 for persons who are not bodies corporate in respect of each act or omission. Careful attention to the maximum penalties is generally required because they have been legislated for, they invite comparison between the worst possible case and the case before the court at the time, and they provide a yardstick to be taken and balanced with all of the other relevant factors: Markarian v The Queen (2005) 228 CLR 357 at [31] per Gleeson CJ, Gummow, Hayne and Callinan JJ.
171 Section 224(4) provides that a person is not liable to more than one pecuniary penalty in respect of the same conduct. It is a fundamental principle of sentencing that double punishment should be avoided for the commission of multiple offences which contain common elements. As a general rule separate contraventions arising from separate acts will attract the imposition of a separate penalty for each contravention: Matcham (No 2) at [197] per Jacobson J. However, if it is appropriate to treat the contraventions as part of a single multi-faceted course of conduct, only a single penalty is appropriate for all contraventions: Mornington Inn Pty Ltd v Jordan (2008) 168 FCR 383 at [41] per Stone and Buchanan JJ; Johnson v The Queen (2004) 205 ALR 346 at [4] per Gleeson CJ; Attorney-General v Tichy (1982) 30 SASR 84 at 92-93 per Wells J.
172 The parties did not make submissions as to whether Mr Jones’ breaches involved one or more courses of conduct, but the course of conduct principle is just a discretionary tool that the Court may utilise in exercising sentencing discretion if the Court considers it appropriate: Construction, Forestry, Mining and Energy Union and Another v Cahill (2010) 269 ALR 1 at [42] per Middleton and Gordon JJ; Royer v Western Australia [2009] WASCA 139 at [21] per Owen JA. It is unnecessary for the Court to identify the precise number of contraventions or courses of conduct arising in the circumstances of the present case as long as Mr Jones’ overall contravening conduct is adequately reflected in the total penalty imposed: Australian Competition and Consumer Commission v Neighbourhood Energy Pty Ltd [2012] FCA 1357 at [44] per Marshall J; Pepe’s Ducks at [39] per Bromberg J.
173 In Adler at [126](ix), Santow J listed factors in earlier cases which had led to a pecuniary penalty in the range of $20,000 – $40,000 as follows:
(a) defendant was aware of impropriety of actions;
(b) no intention to deprive company permanently of funds;
(c) amounts in question not large;
(d) no deliberate falsification of accounts;
(e) cases classed as being serious misconduct, but not worst cases.
174 Mr Jones’ conduct was deliberate, unfair, and exploitative, he showed a blatant disregard for the rights and interests of Mr Eliaser and Mr Patel and he caused them loss or damage. But the quantum of the loss suffered is not large in commercial terms, there was no deliberate falsification of company records and I do not see his contraventions as “worst-case” when the evidence does not establish that his conduct was dishonest.
175 In determining the appropriate penalty I also take into account that:
(a) Mr Jones has been disqualified from managing corporations for two years, and has agreed that he will not be involved in the management and/or marketing of a franchise business for two years. Mr Jones’ disqualification and his undertaking have significant consequences for him which operates as a factor in favour of a lesser penalty: Adler at [126](iv);
(b) he has agreed to pay compensation to Mr Eliaser and Mr Patel. Section 227 of the ACL provides that, where a contravener has insufficient financial resources to pay both a pecuniary penalty and a compensation order in favour of any victim of the contravening conduct, preference must be given to a compensation order. In my view, having regard to Mr Jones’ financial circumstances he is likely to be unable to pay a higher pecuniary penalty as well as the compensation order made;
(c) he has cooperated with the ACCC and did not ultimately contest the proceedings, thereby saving significant costs; and
(d) he has not previously been found to have contravened the ACL.
176 Mr Jones estimated the value of his assets in the sum of $414,387.64 (including his interest in real property owned jointly with Ms Haley), which is less than his liabilities of $448,258.25 (including a home loan taken in both his and Ms Haley’s names). His tax returns record that he:
(a) received a total income of $72,692 in the financial year ended 30 June 2012 ($18,846 of which he received from Coverall and the balance of which he received from previous employment with Coverall’s master franchisor); and
(b) received a total income of $20,000 from his role as Coverall’s director in the financial year ended 30 June 2013;
Coverall is now in liquidation, and Mr Jones is seeking employment outside the franchise industry.
177 He has no assets from which to pay a pecuniary penalty and his future employment is uncertain. While the authorities make it clear that the personal hardship caused to an offender is less important than the need to protect the public through personal and general deterrence (see Matcham (No 2) at [165]-[167]) I must not impose a penalty which is excessive or oppressive. There is a balance required and it is difficult to be precise in regard to the balance.
178 I consider the agreed pecuniary penalty of $30,000 is sufficient when viewed together with the disqualification order, the undertaking, and the compensation order. In my view such a penalty meets the need for general and specific deterrence and falls within the permissible range. I made a pecuniary penalty order accordingly.
179 Taking into account his financial circumstances, I ordered Mr Jones to pay the penalty by instalments commencing in February 2016, commencing after he has met the compensation order.
Costs
180 Mr Jones has agreed to pay a contribution of $5,000 towards the ACCC’s legal costs in the proceeding, doing so by monthly instalments to commence February 2016 after he has met the compensation order.
Relief concerning Ms Haley
181 As part of the settlement the ACCC no longer sought relief against Ms Haley in relation to her involvement in Coverall’s contraventions of the Franchising Code and its misleading representations and conduct.
182 It is unnecessary for the Court to approve the ACCC’s decision in this regard as it is for the ACCC to determine the parties against whom it brings proceedings. However, for completeness, I accept the ACCC’s contention that the objectives of general and specific deterrence are met by the relief granted against Coverall and Mr Jones. I note that:
(a) Ms Haley was not a director of Coverall at the time of her alleged involvement in its contraventions. She was appointed as a director on 24 January 2013 and she ceased to be a director on 1 July 2013;
(b) there was no allegation that Ms Haley was involved in Coverall’s unconscionable conduct (as the ACCC’s case related to her involvement in Coverall’s other contraventions); and
(c) Ms Haley provided an undertaking to the Court that she will not, for a period of two years, be directly or indirectly involved in the management and/or marketing of a franchise business.
183 In my view the terms of the undertaking are appropriate. The evidence shows that Ms Haley was involved in the marketing of Coverall’s franchise business and involved in Coverall’s failure to provide earnings information in accordance with the Franchising Code and in the making of false and misleading representations to Mr Eliaser. The undertaking will provide a measure of protection to other prospective franchisees.
Order under s 137H
184 The parties also proposed an order by consent that sealed reasons for judgment be retained by the Court pursuant to s 137H of the CCA.
185 I consider this order appropriate in circumstances where other Coverall franchisees may have claims against it or Mr Jones, or where franchisees of other companies in the Coverall group using the same documentation as part of the Coverall system may have claims against those companies. It operates to make the findings of fact in this proceeding prima facie evidence of that fact in other proceedings although, to the extent that the findings are based on Mr Jones’ admissions, there may be some difficulty in relying on them: see Australian Competition and Consumer Commission v ABB Transmission and Distribution Ltd (No 2) [2002] ATPR 41-872 at [51] per Finkelstein J.
CONCLUSION
186 On 22 and 23 October 2014 I made the attached declarations and orders.
I certify that the preceding one hundred and eighty-six (186) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Murphy. |
Associate:
