Franchises, secret commissions and unconscionable conduct

In the matter of Ali v ACCC [2021] FCAFC 109, the Full Court of the Federal Court have upheld a judgment finding that the master franchisee of a car washing franchise called "Geowash" (www.geowash.com.au) had acted unconscionably by engaging in a system of conduct that drained the pockets of unsuspecting potential franchisees and paid secret commissions to the master franchise operators.


Facts

The operators of Geowash advertised for investors in a new car wash and offered to assist applicants to locate a profitable site, set it up as a going concern and assist them to begin operation of what was expected to be a highly profitable business.


In truth, the operators of the Geowash franchise were sounding out potential franchisees to learn how much money they could raise to invest, made them pay a $35,000 application fee to get them to commit and then required them to pay the maximum amount they could raise to fund the'site costs' for the proposed site up-front.


In fact, the money paid by the applicants was largely kept as a 'secret commission' by the franchisor and only a fraction of the money paid was devoted to the development of a site that ended up being sub-standard and not capable of running the franchise at all.


Judgment

In considering the actions of the Geowash master franchisors, the full court considered their behaviour in connection with a large number of applicants and found that the demand for payment of the maximum amount they knew the applicants could afford was a dishonest and contrived system aimed only at securing the maximum amount of money possible for the operators and kept as a secret commission.


In upholding the decision of a single judge of the Federal Court, the Full Court unanimously held that deliberate deceptiveness and dishonesty alone was sufficient to found a finding of unconscionable conduct and the fact that it had been repeated across a number of applicants was sufficient to warrant being characterised as a system or pattern.


The Full Court said:


"The characterisation of the system or pattern of conduct as unconscionable was founded upon deliberate deceptiveness and dishonesty. The unconscionability did not rest on the taking advantage of vulnerability. Some of the persons may have been unsophisticated, but the offence to the conscience was the approach, sufficiently common in character to prospective franchisees, of extracting money by a deliberately dishonest body of representations as to how money would be used, when it was in fact used for surreptitious gain."


Fine

Given the substantial amount of money that had been dishonestly obtained by the operators of Geowash over time, the Full Court upheld the following penalties for unconscionable conduct:

  • Geowash: $2,000,000

  • Ms Ali: $800,000

  • Mr Cameron: $640,000


By Rob Norton and Louise Gehrig