Unconscionable conduct in Franchising

The Australian Competition and Consumer Commission (ACCC) recently released a  “Business Snapshot” on unconscionable conduct to help businesses comply with their obligations under the Competition and Consumer Act. The ACCC’s paper has a direct bearing on franchisors.

Case Study – “Hungry” Jack Cowin v Yum! Restaurants

Unconscionable conduct is not a new issue in franchising. The most high profile example of alleged unconscionable conduct on the part of a franchisor in recent years has been the ongoing dispute between “Hungry” Jack Cowin and Yum! Restaurants with regards to the sale of Kentucky Fried Chicken (KFC) Franchises in Western Australia.

Yum! Restaurants are the franchisor for KFC, Pizza Hut and Taco Bell restaurants.

In a submission to the Minister for Competition Policy and Consumer Affairs, Mr Cowin (the franchisee) provided the following on his dealings with Yum! Restaurants (the franchisor):

1. Mr Cowin’s company, Competitive Foods Australia Pty Ltd (“CFA”), opened a KFC Franchise in Rockingham, Western Australia on 19 November 1977.
2. CFA found and purchased the premises site, obtained approvals and built the premises from its own resources.
3. CFA also found and employed the staff and managed the supply chain to the restaurant. At the time, there were no other KFC franchises in Western Australia.
4. Over the following 20 years, CFA opened many Yum! Restaurants franchises throughout Western Australia.
5. CFA wished to renew its franchise agreement for the store in 1997, however Yum! Restaurants stated that it would not grant a further term.
6. Yum! Restaurants then offered to buy CFA’s entire KFC network in Western Australia for an amount representing approximately 40% of its true value. At the time, CFA had no obligation under its franchise agreement to sell its network to Yum! Restaurants, or to any third party, and none of its other franchise agreements were due for renewal.
7. Not only would Yum! Restaurants not allow CFA to renew the franchise agreement for the Rockingham Store unless it sold all of its KFC stores in Western Australia to Yum! Restaurants at a drastically discounted rate, but at no time could CFA sell the Rockingham Store to anyone else because Yum! Restaurants refused to guarantee tenure to the prospective buyer.
8. Mr Cowin’s store was forced to close in 2007.
9. Less than two years later, Yum! Restaurants opened its own KFC store in Rockingham.
10. The matter remains ongoing.

As a Franchisor, How do I avoid Unconscionable Conduct?

The “Business Snapshot” issued by the ACCC provides a number of practical tips to avoid engaging in unconscionable conduct that can be applied by Franchisors:

• Do not exploit the franchisee when negotiating the terms of their franchise agreement.
• Take care to be reasonable when exercising your rights under a franchise agreement.
• Consider the characteristics and vulnerabilities of your franchisees. For example, use plain English when dealing with franchisees from a non-English speaking background.
• Make sure your franchise agreement is comprehensive (without being too lengthy), easy to understand and does not include harsh, unfair or oppressive terms.
• Ensure you have clearly disclosed important or unusual terms or conditions of your franchise agreement in your disclosure document.
• Ensure that the franchisee understands the terms of their franchise agreement and give them the opportunity to consider the offer properly. If the franchise agreement is long, you may decide to provide a summary of the key terms.
• Actively encourage franchisees to seek advice about their franchise agreement before they sign it.
• If things go wrong, be open to resolving complaints and, where appropriate, setting aside contracts or agreements or parts thereof.
• Do not reward your staff for unfair, pressure-based selling.

Please contact me should you have any questions or queries in relation to your obligations as a franchisor.