Unconscionable Conduct

We once acted for a franchisor who had a franchisee with unpaid royalties of  about $7,000.

No big deal right?

The franchisor's attitude was one of annoyance but it did not want to take action to pursue the debt and the issue festered beneath the surface for the best part of a year.  That is, until the franchisee had negotiated extraordinarily favourable lease terms for a new premises located within a highly sought after retail precinct.

Then, all of a sudden, the franchisor became very concerned about the unpaid royalties and wished to use them as the basis to terminate the franchise agreement and take the premises as its flagship store.

Is anyone seeing the problem here?

So, we issue the Notice of Breach on behalf of the franchisor requiring payment within 30 days.  Note, the franchisor wanted payment within 7 days, but that could be unconscionable in circumstances where the debt has been allowed to accumulate with no previous action for close to a year.  So, as the Franchising Code of Conduct states a reasonable time need not be more than 30 days, we gave them 30 days.

The issue then arose that the franchisee was putting everything into this new space.  They did not have the funds to pay $8,000 (it had increased over the year) within the time frame allowed.

The franchisor wanted to terminate the franchise agreement once the 30 days had lapsed.

It would appear to all and sundry that the franchisor's intention was to gain a commercial advantage in taking the new premises.  This very well may be unconscionable conduct.

The franchisee obtained the advice of a lawyer who of course claimed unconscionable conduct in the circumstances.

The franchisor's options were to:

1.  go ahead and terminate, take the rental space and hope the franchisee did not pursue the franchisor and its directors for infringing the unconscionable conduct provisions of the Competition and Consumer Act 2010;

2.  institute proceedings against the franchisee for the debt owing.  If judgment was ordered against the franchisee and it was unpaid then, as the franchisee was a company, application could be made to wind up the company.  If the company is wound up then the franchise agreement may be at an end because the franchisee no longer exists;

3.   issue a statutory demand and again make application to wind up the company if the debt is not paid (same but often quicker outcome than above);

4.  manage the franchisee out of the franchise system.

Remembering the franchisor really wanted the franchisee out of the system so they could take the space, they elected to manage the franchisee out of the system which outcome saw the parties entering into a deed of settlement and release.  That gave the franchisor and the directors certainty that their would be no future action against them.

Then the franchisee went and breached the restraint of trade clause, but that is another story......