Fraudulent franchisee in court win over dishonest Allphones

A judge has slammed both the dishonest conduct of mobile phone franchise Allphones and the dodgy actions of a franchisee in a Federal Court decision relating to withheld commission payments.

Franchisee Hoy Mobile launched legal action in 2006 alleging Allphones had unconscionably withheld commission payments Hoy was owed on mobile phone sales made in its Eastlake, NSW store.

But Allphones didn’t take the allegation lying down, claiming that Hoy had engaged in fraud by unlocking mobile phones and selling them for a higher price without informing the franchisee.

The result – a 16 day court case and 400-page decision that details the messy affair – is a classic example of just how bad things can be when a franchise relationship goes wrong.

Over 200 pages Federal Court judge Steven Rares sets out a litany of broken agreements, Franchising Code breaches, bad blood and ultimately fraud and unconscionable conduct between Hoy Mobile and Allphones.

He found that Allphones breached provisions of the Franchising Code almost from day one by not giving Hoy Mobile the necessary disclosure documents and entering a franchise agreement without proof Hoy had received independent advice on the contract.

More serious, however, was failure of Allphones to pay Hoy Mobile the commission and mobile payments it was entitled under the franchising agreement.

After piecing together the details of Allphones arrangement with Hoy Mobile – although both agreed they had signed a franchise agreement, neither retained a copy – Justice Rares ruled that Allphones had failed to pass on around $75,000 in commission and bonus payments Hoy Mobile had earned by signing customers up to mobile phone contracts.

In doing so, Justice Rares said, Allphones had acted with “calculated dishonesty” and “acted deceitfully in breaching its obligations to pay commission over virtually the whole time of the relationship”.

Franchisee Craig Hoy fares little better in the decision. Justice Rares found that by unlocking mobile phones and selling them for higher prices without the knowledge of Allphones, Hoy had defrauded Allphones of $30,000 in fees.

“Mr Hoy’s conduct was much than ‘dodgy’, it was downright dishonest, deliberate and done for the personal financial gain of Mr Hoy,” Justice Rares said.

In the final result, Allphones was required to pay Hoy Mobile just over $40,000 in damages. Crucially, however, the question of costs – likely to exceed the damages payout by many times – has yet to be determined.

Philip Colman, a partner with law firm Mason Sier Turnbull, which specialises in franchising law, estimates the legal bill for the case could easily extend into hundreds of thousands of dollars for each side. “The case points to an absolutely awful relationship where they went in hammer and tongs for three weeks in the Federal Court, and it would have cost both sides a fortune,” Colman says.

The case also touches on the question of whether failure to comply with the Franchising Code can invalidate a franchise agreement, an issue soon to be considered by the High Court in the Ketchell case.

Justice Rares dismisses the NSW Court of Appeal’s decision in an earlier stage of Ketchell, where a ruling was made that Franchising Code breaches can invalidate franchise agreements, as “plainly wrong”

“This decision just highlights the uncertainty in the law that Ketchell has created. There are differing legal opinions and it makes in all the more important that the High Court clarifies the issue,” Colman says.

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