Franchisor Unconscionable Conduct

Many legal claims advanced against franchisors allege they have engaged in unconscionable conduct. The Australian Consumer Law prohibits unconscionable conduct, and renders a party who breaches this provision liable for damages and subject to significant penalties. But what is unconscionable conduct in the context of franchising, and what can franchisors do to avoid being the subject of such allegations? 

What is unconscionable conduct? 

Section 21 of the ACL provides: 

engage in conduct that is, in all the circumstances, unconscionable

Unconscionable conduct is not defined in the ACL, and there is no single definition which applies. To understand what unconscionable conduct is, then, it is necessary to examine cases where that provision has been considered, and also the guidance provided in section 22. Section 22 of the ACL outlines factors the Court considers, including:

  • The parties’ bargaining power (s22(1)(a)).
  • Whether the supplier imposed unnecessary conditions on the customer (s22(1)(b)).
  • The customer’s ability to understand related documents (s22(1)(c)).
  • Any undue influence exerted by the supplier (s22(1)(d)).
  • Options available to the customer elsewhere (s22(1)(e)).
  • Consistency of the supplier’s behaviour (s22(1)(f)).
  • Compliance with industry codes (s22(1)(g) and (h)).

What are some examples of cases that consider franchisor unconscionable conduct? 

A leading authority that considers the application of the unconscionable conduct provisions of the ACL to franchisor conduct is the Yum! decision Diab Pty Ltd v  YUM ! Restaurants Australia Pty Ltd [2016] FCA 43, being a class action bought by numerous Pizza Hut franchisees against their franchisor following the franchisor’s introduction of a mandatory ‘low cost’ model across the Pizza Hut Australia network. 

In that decision Justice Jagot stated (at [26])  “There is no evidence whatsoever to suggest that Yum believed it was acting solely in its own financial interest at the expense of and without any proper or reasonable regard for the interests of the franchisees in maintaining the profitability and asset values of their franchise businesses. To the contrary, the evidence adduced by the respondent consistently discloses that Yum believed, and continues to believe, that it is acting in the financial interests of all parties to the franchise agreement and with a proper view to maintaining the profitability of the franchisees’ businesses as a whole.

Another example is found in ACCC actions. In 1996, the ACCC commenced action against the Ultratune franchisor on the basis they had engaged in unconscionable conduct by adopting a practice whereby franchisees were ‘locked out’ of accessing their software on a predetermined date, and until a password was provided by the Franchisor. The Franchisees were not made aware of this practice. The matter ultimately settled through the provision of enforceable undertakings. This case indicates that withholding information from Franchisees and a general lack of transparency can be considered unconscionable conduct. 

There have been binding court decisions where the Franchisor has been deemed to have engaged in unconscionable conduct. In the matter of ACCC v Geowash Pty Ltd (Subject to a Deed of Company Arrangement) (No 3) [2019] FCA 72 the Court found that Geowash acted unconscionably towards franchisees through its charging practices for the establishment and fit-out of Geowash franchise sites. The amount Geowash charged its franchisees did not reflect the likely costs of establishing those sites but instead the amount franchisees were willing to pay. Here, in handing down its decision, the Court commented that unconscionable conduct is characterised by a substantial departure from that which is generally acceptable commercial behaviour”

All of these cases indicate that unconscionable conduct involves an act of malice or disregard for franchisees interest. A bad business decision will not be enough to demonstrate unconscionable conduct, but the conduct must represent a substantial departure from generally acceptable commercial behaviour. 

What happens if the Courts find Franchisor’s committed unconscionable conduct?

If a Court determines that a person has engaged in unconscionable conduct, the remedies available include:

  • compensation for loss or damage;
  • having the contract declared void or set aside; and/ or
  • financial penalties.

Importantly, individual directors can also be liable. In the Geowash decision, for example, Geowash’s director, Sanam Ali, was found to be knowingly involved in all of Geowash’s conduct. Charles Cameron, Geowash’s Franchising Manager, was also found to be knowingly involved in Geowash’s unconscionable conduct and failures to act in good faith. Both individuals were penalised. The director Sanam Ali was fined $1.045 million and ordered to pay $500,000 as partial redress to the franchisees. The franchising manager Charles Cameron was also fined $656,000. 

How can franchisors avoid being subject to claims of unconscionable conduct? 

There are a number of steps Franchisor’s can take to avoid being subject to such claims. These include: 

  1. Being transparent in dealings with franchisees; 
  2. Making sure important business decisions that impact the network or individual franchisees are thoroughly investigated; 
  3. Keeping records of the matters considered before making any significant decision; 
  4. Providing notice to franchisees of any proposed significant changes, and inviting franchisee feedback; and
  5. Being fair and honest in dealings. 

Key Takeaways

  1. Unconscionable conduct, under Australian law, means extremely unfair actions in business, like exploiting power imbalances or imposing undue conditions.
  2. Cases like Diab Pty Ltd v YUM! Restaurants Australia Pty Ltd and ACCC actions against Ultratune and Geowash illustrate what unconscionable conduct is, and is not, in the context of franchising. 
  3. To avoid such claims, franchisors should be transparent, consider business impacts thoroughly, keep detailed records, seek franchisee feedback on changes, and consistently act fairly and honestly.


Disclaimer: This article contains general information only and does not constitute legal advice. Magnolia Legal disclaims any liability arising from reliance on this article. Our terms of use apply