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If you are a franchisee locked into a dispute with your franchisors, it is likely you want to know whether your franchisor has acted ‘unconscionably’ under the law. Unconscionable conduct is conduct which is so harsh that it goes against good conscience. You may consider your franchisor’s behaviour as unconscionable conduct if it is especially bad for one reason or another. Often, there is no one element that will ‘make or break’ a claim for unconscionable conduct. However, unconscionable conduct is not simply another argument you can attach to a dispute. This article explores what:

  • unconscionable conduct legally means;
  • happens if the court finds that a franchisor has acted unconscionably; and
  • contributes to unconscionable conduct.

What Does Unconscionable Conduct Legally Mean? 

The Australian Consumer Law prevents a person, in trade or commerce, from engaging in conduct that is unconscionable. The legal threshold for unconscionable conduct has been determined over time by the courts. 

For example, in one case, the High Court noted that unconscionable conduct is determined as ‘against good conscience in the eyes of a reasonable person’.

What Behaviour Counts as Unconscionable Conduct? 

A court will look at certain common factors when determining if a franchisor has acted unconscionably. These include: 

  • the parties relative bargaining positions (i.e. is there unequal bargaining power which might have been exploited?);
  • any use of undue influence (i.e. has one party exerted pressure on the other?);
  • whether the behaviour was reasonably necessary (i.e. was the behaviour necessary to protect a particular interest?);
  • each party’s ability to understand the documents (i.e. did the parties have the opportunity to read, understand and seek advice on the documents or contracts?); 
  • disclosure of relevant facts (i.e. did a party fail to disclose information which would likely affect the other party?)
  • whether the ‘weaker’ party was given the opportunity to make inquiries or negotiate the terms of the contract;
  • the terms of the contract (or contracts) and whether there were ‘unfair contract terms’; and
  • the conduct of the parties after entering into contractual relations (i.e. has the ‘stronger’ party used its rights and powers without good reason?). 

These are important considerations that the court will take into account when deciding whether or not a party has acted unconscionably. However, none of these elements alone will be enough for a court to find unconscionable conduct. Instead, it will be the overall impression of the conduct after having considered all those elements that will lead a court to find that a franchisor has engaged in unconscionable conduct. 

Importantly, several elements listed above are relevant factors when considering other possible breaches, such as the: 

  • requirement to act in ‘good faith’; and 
  • the prohibition relating to misleading or deceptive conduct. 

Quite often, and especially in the context of franchising, these breaches are claimed together. 

When Have the Courts Found a Franchisor to Have Acted Unconscionably in the Past? 

If you are a franchisee, it is likely that the relationship between you and your franchisor is unique. Due to this, there are several common themes and factors a court will consider when unconscionable conduct is alleged. 

For example, in recent franchising case, the court found that the franchisor had engaged in unconscionable conduct. Amongst other things, the franchisor had: 

  • failed to pay money to the franchisee for provided services;
  • continued charging franchise related fees (without a contractual right to do so);
  • exploited the bargaining power of the franchisee (the franchisee was young and inexperienced); and 
  • exploited the fact that the franchisee had taken out a loan to purchase the franchise in the first place.

In another case, the court again found the franchisor engaged in unconscionable conduct. On this occasion, the key contributing factors included that:

  • the franchisor spent funds paid to them relating to the ‘fit out’ improperly; and 
  • most franchisees were ‘unsophisticated and inexperienced in business’. This means that they were unable to investigate how the funds were spent. 

In this case, it was not simply the franchisor’s failure to act in accordance with the terms of the franchise agreement that gave rise to unconscionable conduct. It was the ‘dishonesty’ of charging fees for fit out costs and then transferring the funds to the director and national franchising manager.

Key Takeaways

As a franchisee, you should be aware that franchisors cannot engage in unconscionable conduct. If your franchisor engages in unconscionable conduct, you may be able to commence legal action against them. However, in most cases, a court will find that a franchisor has engaged in unconscionable conduct after another breach of your contract represents behaviour that is dishonest, exploitative and below the accepted standards of commercial behaviour. 

If you are considering bringing a dispute against your franchisor, you should seek expert legal advice on what claims you may have and what strategy is appropriate. If you have any questions about disputes against franchisors, contact LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page. 

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