The Franchise Agreement: What is Unconscionable Conduct?

In Short

• Unconscionable conduct occurs when a business acts unfairly, exploiting another’s vulnerability. It is prohibited under the Competition and Consumer Act 2010 (Cth).
• Key factors courts consider include bargaining power, good faith dealings, and undue influence.
• Franchisors must be transparent—misleading franchisees or abusing power can lead to legal consequences.

Tips for Businesses

Ensure fairness and transparency in franchise dealings. Avoid pressuring franchisees into unfair agreements or withholding key information. Keep records of negotiations and act in good faith. If unsure about compliance, seek legal advice. Protecting your business from unconscionable conduct claims will help build trust and avoid costly disputes.

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Table of Contents

• What is Unconscionable Conduct?
• Example
• Undue Influence
• What a Court Might Consider
• Key Takeaways
• Frequently Asked Questions

As a franchisor or franchisee, you must be mindful of unconscionable conduct in all commercial dealings, including with prospective or actual franchisees. In determining whether specific conduct is unconscionable, you must consider several factors. This article will explore unconscionable conduct and the factors influencing a court’s decision.

Franchisor Guide to Misleading and Deceptive Conduct

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What is Unconscionable Conduct?

The Competition and Consumer Act 2010 (Cth) (‘The Act‘) prohibits unconscionable conduct in connection with the supply or possible supply of goods or services. However, there is no specific legal definition of unconscionable conduct provided. 

Unconscionable conduct refers to actions that exceed what is deemed fair and reasonable in business dealings, lying outside the expected standard of good conscience. This concept aims to assist small businesses and consumers who unwittingly become targets of larger corporations, aiming to level the playing field in business transactions. The laws against unconscionable conduct prevent larger corporations from taking advantage of small businesses and consumers who may not have the same resources, knowledge, or bargaining power. 

The court will consider several factors in determining whether specific actions are unconscionable. This includes: 

• the parties’ respective bargaining power; 
• the parties’ intentions; and 
• the extent to which actions or dealings were undertaken in good faith. 

Additionally, below is an example of a franchisor who was deemed to have breached the unconscionable conduct provisions of the Australian Consumer Law. Indeed, it acts as a reminder to franchisors of the importance of transparency and honesty in dealings. 

Example

In the case of the Australian Competition and Consumer Commission v Geowash Pty Ltd (2019), Geowash was a car wash franchise business operator. The ACCC and the Federal Court found that Geowash had engaged in unconscionable conduct, as the business model was inherently dishonest. The franchisor demanded amounts from the franchisee deemed necessary to meet the costs of the franchise fit-out. However, the franchisor always intended the money to be used for another purpose. 

The court found the franchisor was, in essence, deliberately overcharging and charging franchisees what they were willing to pay, as opposed to what the fit-out would cost. It was also found that the franchisor was negotiating the sale of franchises to prospective franchisees who were typically unsophisticated when it came to owning and operating a business, a factor relevant to the finding of unconscionable conduct.

Undue Influence

Undue influence is one of the most notable examples of unconscionable conduct. It occurs when a stronger party uses their influential position to pressure a weaker party. In such cases, the weaker party may feel compelled to comply due to the influence exerted by the stronger party, even if the agreement is not in their best interests. 

If a relationship of influence does exist, the party benefiting from the agreement must prove that it did not impose any undue influence on the other party. This helps to protect the weaker party and ensure that the agreement is entered into freely and fairly.

A common occurrence of this is the franchisor-franchisee relationship, where the franchisor generally will substantially influence a prospective franchisee. The franchisor may use this influence to get the prospective franchisee to agree to a franchise agreement that is not in their best interest.  If you believe you have been a victim of undue influence in a franchise relationship, it may be helpful to speak with a franchise solicitor to understand your rights and any steps you may be able to take.

What a Court Might Consider

A court may consider various circumstances in an allegation of unconscionable conduct. For instance, this might include:

• the bargaining power of each party;
• any undue influence;
• the extent to which ‘legitimate interests’ were protected and whether the stronger party overstepped the mark;
• whether any information was miscommunicated to the party alleging misconduct;
• whether the treatment of other parties by the stronger party was comparable in other commercial transactions;
• whether the weaker party was able to supply the goods or services elsewhere;
• whether there was any lack of disclosure that may impact the interests of the weaker party;
• whether the negotiations between the parties were conducted ‘in good faith’;
• the Franchising Code of Conduct;
• any applicable contracts that the parties have entered into; and
• the conduct of both parties throughout their dealings.

Key Takeaways

As a franchisor or franchisee, it is crucial to understand unconscionable conduct and how to avoid it. Indeed, undertaking such conduct may not only breach your franchise agreement but also violate the Act.

If you believe you have been a victim of unconscionable conduct, seeking advice from a solicitor is essential. They can help you assess your situation, understand your rights, and determine the best course of action.

For more information or assistance protecting against your franchise business, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page. 

Frequently Asked Questions