News & Insights

A handful of recent court cases have emphasised key takeaways for franchisors when operating their franchise businesses. We have flagged those important reminders below.

1. don’t act unfairly or dishonestly

It is critical franchisors are fair with all dealings they engage in.

The outcome in ACCC v Geowash (No 4) [2020] FCA 23 (Geowash) serves as a good reminder to franchisors (and individuals who work for a franchisor), that significant pecuniary penalties can and will be imposed by the court where the ACCC has pursued a franchisor for acting in a dishonest, disreputable and unconscionable manner.

In Geowash, the Federal Court of Australia determined former car wash franchisor, Geowash, as well as its sole director and national franchising manager had engaged in unfair dealings with franchisees and had also acted unconscionably towards franchisees. The Court ordered Geowash pay $4.2 million in penalties.

Franchisors should note the Federal Court has previously imposed significant pecuniary penalties on franchisors engaging in unfair conduct and tends not to group individual offending conduct together, resulting in a selection of heavy penalties.

The ACCC has historically put substantial resources into penalising franchisors for such conduct and may seek redress orders. Directors and managers of a franchise business have also faced disqualification orders.

2. do tie in any leases or licenses into your franchise agreements

Disputes with franchisees may be of relevance to lease or licence agreements, but only if the agreements are inextricably linked. These links can occur in instances where premises are licensed to the franchisee for the sole purpose of them carrying on the franchise business.

The interdependence of obligations under each agreement can be beneficial, for example the franchisor’s performance of its obligations under the licence agreement are contingent on and interdependent on the franchisee’s obligations under the franchise agreement. However, this also applies the other way around and can therefore affect a franchisor’s ability to enforce obligations under a lease or licence agreement, as per the decision in Meetfresh Franchising Pty Ltd v Ivanman Pty Ltd [2020] NSWCA 234 (Meetfresh Franchising)

In Meetfresh Franchising, the NSW Court of Appeal decided against the franchisor. The Court held the franchisee was not liable for licence fees and other amounts payable under the licence because of the franchisor’s breach of the interlinked franchise agreement.

3. don’t be greedy when including a liquidated damages clause – make it proportionate

The recent decision in Raine & Horne Pty Ltd v A & R Real Estate Pty Ltd & Anor [2020] SADC (Raine) highlights the significance of correctly drafted liquidated damages clauses, to ensure damages can be sought for a breach of the franchise agreement.

In Raine & Horne Pty Ltd v A & R Real Estate Pty Ltd & Anor [2020] SADC, a key issue the Court considered was whether the liquidated damages clause within the franchise agreement was enforceable as a penalty. In favour of the franchisor, the Court found the clause was foreseeable and a genuine pre-estimate of the loss that would be suffered by the franchisor, and therefore was enforceable.

The key takeaway from this case is that while events of default can give rise to the contractual right to terminate and in turn seek liquidated damages, not all liquidated damages clauses will hold up in court. To ensure your business is able to seek damages in such situations, it is critical franchise agreements include liquidated damages clauses which are proportionate and an agreed and genuine pre-estimate of loss. If a liquidated damages clause punishes a franchisee for a breach, this will be deemed a penalty and therefore unenforceable.

4. do be aware of any changes to the franchise structure

Franchisors should remain vigilant when keeping across any changes occurring in the franchise structure (such as changes to master franchise arrangements) or to the chain of intellectual property ownership. Such changes may impact a franchisor’s ability to satisfy its obligations under a franchise agreement and result in a breach, as Meetfresh Franchising Pty Ltd discovered in Meetfresh Franchising Pty Ltd v Ivanman Pty Ltd.

what do I need to consider as a franchisor?

Stemming from these cases are some questions for franchisors to consider:

• Are all your dealings fair?
• Do you have a liquidated damages clause within your franchise agreement? If so, is it proportionate?
• Do your franchise agreements make direct reference to your leases and licence agreements with franchisees, and vice versa?
• Have there been any changes to the ownership of intellectual property licensed to franchisees, or any other changes to the franchise structure?

If you are unsure about your answers to the questions above, or have any other queries about a franchising matter, please contact a member of Macpherson Kelley’s dedicated Franchising team.