Franchisors Liability for Franchisee Conduct

Just as the Courts extended the liability of franchisors for their franchisees who underpaid or took advantage of their employees under the vulnerable workers provisions of the Fair Work Act, a decision of the Federal Court in August 2025 sends a clear message to franchisors and master franchisors.

The Court here found the master franchisee liable for their franchisees misconduct, even when it had no direct dealings with the customer, but they were knowingly involved in the misleading conduct as they provided franchisees the systems and marketing collateral to sell the goods.

Rent4Keeps was a master franchisor that supplied whitegoods, TVs and furniture under long-term rental agreements, known as “rent to buy” arrangements, across Australia.

The franchisor provided franchisees with support such as brand development, marketing, administration, IT systems and policies.

The franchisees’ target customer was lower-income households who could not afford to purchase goods outright or access credit so they would rent goods, at the end of which the goods the marketing stated the goods would be ‘gifted’ to the customer or nominee (friend or relative).

The franchisees’ role was to source goods from retailers, deliver them to the customer and have the customer enter into a standard-form rental agreement generated by the franchisor system.

The “Rent4Keeps”, marketing and customer scripts emphasised customers would keep the goods after making all rental payments, but the rental agreement was not so clear. In fact, the agreement stated the franchisor had discretion to refuse to gift the product at the end of the rental period.

This was not made clear in their marketing which made it appear that gifting the goods at the end of the term was guaranteed, which was not the case.

ASIC alleged that the franchisee Darranda Pty Ltd breached the National Credit Code by presenting the agreements as “consumer leases” not credit contracts, to avoid the cost cap and disclosure requirements required for credit contracts under that Code.

The Court found the agreements were, in substance, credit contracts disguised as consumer leases and although the agreement stated Rent4Keeps “may” gift the goods, customers were given the impressions that they would own them, and customers were given an expectation they would ultimately own the goods.

ASIC alleged the contracts also breached the general conduct obligations under s 47 of the NCCP Act to engage in credit activities efficiently, honestly and fairly, with the words “honestly” and “fairly” giving ‘the flavour of a person who… is ethically sound’ (ASIC v AGM Markets) and this did not align with the evidence that they failed to update their terms despite receiving legal advice to do so.

The Master franchisor provided franchisees the sales scripts, which were misleading and aimed to give customers the impression that they would own the product at the end of the term.

One of the issues was that the branding “Rent4Keeps” by its very name, suggests you rent and then keep the goods, which was not the case.

ASIC argued, and the Court accepted, that the Master franchisor was “involved in” the contraventions (s 169 of the Credit Act) and therefore jointly liable for having drafted the contracts, operated the CRM system, issued the operations manuals and supervised the compliance process and they were therefore the “architect” of the offending conduct.

The Master franchisor argued (it was not accepted) that it should not be liable because its director and CEO did not have actual knowledge of all the contractual terms in the agreement.

The Court stated that as they were aware, or “ought to have been aware”, of the terms and also received legal advice and regulatory warnings and ignored them that they were also liable as the knowledge was “imputed” to it. (Tesco Supermarkets v Nattrass).

The Federal Court imposed a penalty of $4 million against Rent4Keeps, and $3.4 million against the franchisee Darranda Pty Ltd for overcharging consumers on essential household goods and failing to comply with the obligations as credit licensees.

• Franchisors can be held liable for the misconduct of their franchisees, particularly in highly regulated sectors dealing with consumers.

• The franchisor may be liable under the “knowingly involved” provisions where they design and control systems used for the misconduct.

• Franchisors need to ensure the material they supply their franchisees is compliant.

• It matters not what you call the agreement; it is a question of fact and how it operates in practice.

• Ensure you do not promise what you cannot deliver! Ensure your marketing and training align, and that staff do not make promises inconsistent with the contract.

• The courts have highlighted that the franchisor should embed in its systems proper regulatory compliance and oversight, training, audit and enforcement mechanisms.

• Ensure you operate in accordance with your branding.

Robert Toth I Special Counsel I Accredited Commercial & Franchise Law Specialist

robert@sanickilawyers.com.au | mobile 0412 673 757