Geowash washes up: Employees personally liable for penalties for misleading conduct in franchise negotiations

While the payment of a $2.5million penalty against Geowash is stayed given the company's financial status (it is currently under administration), the magnitude of the penalty, combined with the restraints and penalties ordered against an individual director and employee are a warning to franchisors that breaches of the Franchising Code and the Australian Consumer Law have serious consequences.

What did the case involve?

The ACCC commenced proceedings in the Federal Court of Australia against Geowash, Sanam Ali (the sole director of Geowash) and Charles Cameron (the national franchising manager), alleging breaches of the Competition and Consumer Act (2010) (CCA) and the Australian Consumer Law (ACL) in relation to carwash franchises established between 2013 and 2016. Geowash was put into administration prior to proceedings being commenced by the ACCC. The ACCC provided an undertaking to the administrators of Geowash not to enforce any relief against Geowash without leave of the Court and Geowash was not represented at the final hearing.

The Court held that Geowash published false and misleading representations on its website between 21 May 2015 and 13 May 2016 that;

• prospective franchisees could make gross revenues of $70,216 and gross profits of $30,439 in an average 28 day period when this was not true and Geowash had no reasonable basis to make such a claim.

• Geowash had commercial relationships with each of Nissan, Kia, Renault, Audi, Emirates, Shell, Hertz, Holden, Ikea and Thrifty when this was not true. 

The Court found that, from 2013 until approximately October 2016, Geowash provided franchise agreements and mandatory franchise disclosure documents to some prospective franchisees that made incorrect statements about the charges that would be issued by Geowash. The Court found Geowash entered into a 'considered practice' whereby, inconsistently with the terms of the franchise agreement and disclosure documents, Geowash would negotiate a purchase price for franchisees based on what the individual franchisee was willing to pay and represented this amount was required to meet fit out and set up requirements. It was found that the negotiations would proceed as follows:

• Ali and/or Cameron would ascertain the maximum budget of a prospective franchisee;

• Negotiations would be undertaken and representations were made that a franchise could be acquired for a lump sum, typically the maximum budget of a prospective franchisee;

• A franchise agreement would be entered into with the prospective franchisee and, shortly after, Ali and/or Cameron would demand payment of the lump sum. The lump sum was demanded without any reference to the actual cost of fit out or set up of the franchise site. 

In fact the purchase price was used to pay sales commissions to Ali and Cameron and as general funds for the Geowash business. Consequentially, funds that should have been available for fit out costs were not available when required. This practice exposed franchisees to the risk that they would not be able to establish a Geowash outlet as described, or, in some cases, not at all. The Court found this conduct "would be considered to involve trickery and deception when measured against business norms"1 and therefore amounted to unconscionable conduct in contravention of s21 of the ACL, and failed to comply with the Franchising Code of Conduct in respect of its dealings with four franchisees2 and therefore contravened s51ACB of the CCA.

The Court also held that Ali caused Geowash to engage in the conduct described above and was therefore knowingly concerned in, or a party to, all of the contraventions described above. In respect of Cameron, the Court held he was knowingly concerned in, or a party to, the fact the franchise agreements and disclosure documents made incorrect statements about the charges that would be issued by Geowash.

What were the penalties awarded?

The Court ordered that Geowash was to pay $2.5 million in respect of the contraventions. Given Geowash was in administration, the order for payment of the penalty was stayed.

The Court also ordered the following penalties against the former employees of Geowash:

• Ali was ordered to pay $1.045 million by way of penalty, and Cameron was ordered to pay $656,000;

• Both Ali and Cameron are restrained for five years from being knowingly concerned with, or a party to, conduct of the kind referred to in the contraventions;

• Each of Ali and Cameron are to pay $500,000 by way of non-party consumer redress for partial redress of loss and damage suffered by some franchisees of the Geowash business. The amount of any redress under the judgment is capped at 20% of the amount paid by that person to Geowash in addition to a deposit and establishment fee for the fit out and set up of a Geowash outlet.

• Ali is disqualified from managing a corporation for a period of five years, and Cameron is disqualified from managing a corporation for a period of four years. 

What can franchisors learn from this case?

While the factual circumstances that led to the Court findings and penalties in this case are extreme, there are clear learnings for franchisors: 

• Franchisors should ensure their franchise documentation are adhered to in all dealings with franchisees. While Geowash did have franchise documents in place, they contained misleading financial information, cited embellished qualifications for Ali, misrepresented the nature of payments and in most instances were disregarded by the franchisor in dealings with franchisees.

• All costs incurred by franchisors that are passed on to franchisees should be appropriately assessed, particularly in circumstances where the costs are for services including project management or design which are undertaken by the franchisor. The Court found that fees were levied without reference to a transparent model and Ali and Cameron "dealt with franchisees by obtaining information on what they were willing to pay, expecting that they would be paid commissions and Geowash would expend much less than the invoiced amount on setting up a franchise outlet".3 This conduct was found to be unconscionable.

• All advertising representations should be verifiable. Website representations made by Geowash of "average" sales and profits were found to be the actual trading figures of one franchise during a specific month and were not an average, nor representative of monthly trading. Profit numbers are not the place for puffery.

• Individual employees and directors can be personally liable for penalties. Such liability cannot be indemnified by the company.

This case is a salient warning for franchisors and their employees. Transparency and fair dealing must flow through their dealings with franchisees and prospective franchisee at all times. Sellers beware.