The Federal Court of Australia’s decision in Australian Securities and Investments Commission v Darranda Pty Ltd (Liability) [2024] FCA 1015 (ASIC v Darranda) provides notable insight into the Court’s scrutiny of a franchisor’s role in overseeing the conduct of its franchisees.
The Federal Court confirmed that franchisors can be held liable for franchisee misconduct occurring within their franchise network, even if it has no direct dealings with consumers. This is particularly the case where the franchisor designs or controls the contractual and operational framework of the franchise system and there are systemic compliance failures across the franchise network.
Background
Rent4Keeps operated a franchise system offering new household goods, such as whitegoods, televisions and furniture, under long-term rental agreements. The business model operated across Australia through several regional franchisees, the largest of which was Darranda Pty Ltd.
Within its franchise network, Rent4Keeps acted as a master franchisor responsible for brand development, marketing, administration, IT systems and franchise policies. The franchise’s target customer base consisted primarily of lower-income households who could not afford to purchase goods outright or access mainstream credit.
The franchisee would source goods from retailers, deliver items to customers and enter them into standard-form contracts (Agreements) generated by a centralised system under the oversight of Rent4Keeps.
The business was branded around the premise of eventual ownership, but its contracts were ambiguous in upholding this promise. While the “Rent4Keeps” name, marketing slogans and customer scripts emphasised that customers would keep the goods after making all rental payments, the actual contractual mechanism was styled as a gift model. Under this model, at the end of the rental term, the customer would nominate a third-party “giftee”, often a friend or relative, however, Rent4Keeps retained contractual discretion to gift or refuse to gift the product.
Issues before the Court
The Consumer Lease vs Credit Contract Distinction
ASIC alleged that Darranda Pty Ltd had contravened the National Credit Code by falsely presenting its Agreements as consumer leases as opposed to credit contracts, in order to avoid the cost capping and disclosure requirements that apply to the latter under the Code.
The gift model referred above was presented to Rent4Keeps customers as a guaranteed feature of the lease program through its marketing and operational practices. However, customers were not meaningfully informed that the contracts preserved Rent4Keeps’ discretion to withhold the gift at the end of the term.
The Court held that despite the contractual wording, when considered in light of their operational reality, the Agreements created an expectation that the customer (or their nominee) would ultimately own the goods.
The court found that the contracts offered by Rent4Keeps were, in substance, credit contracts disguised as consumer leases, as although the contracts used the language of discretion, stating Rent4Keeps “may” gift the goods, the Court held that actual practice removed any meaningful uncertainty in the mind of the consumer.
Breach of National Consumer Credit Protection Act 2009 (NCCP Act)
ASIC further alleged that the Rent4Keeps contracts breached the general conduct obligations under s 47 of the NCCP Act, including the duty to engage in credit activities efficiently, honestly and fairly.
The Court was persuaded by evidence that Rent4Keeps was in breach of s 47 of the NCCP Act as it, among other things, failed to update contractual terms despite receiving legal advice advising it do so, and implemented misleading scripts used by franchisees to give the impression that the lessee would own the product at the end of the term.
Franchisor Involvement
Crucially, the Court accepted ASIC’s allegation that Rent4Keeps, was “involved in” the above contraventions and therefore jointly liable.
The Court found that Rent4Keeps, as the master franchisor, had drafted the contracts, operated the CRM system, issued manuals and supervised compliance processes. It was, in substance, the architect of the offending conduct.
Rent4Keeps’ relied on its director and CEO not having actual knowledge of all contractual terms to escape liability, but this argument was rejected as they had awareness of the effect of the ownership provisions and the gifting mechanism, and had received egal and regulatory warnings about their consequences.
Penalties
The Federal Court imposed a penalty of $4 million against Rent4Keeps and $3.4 million against Darranda Pty Ltd, for overcharging consumers on essential household goods, and for failing to comply with their obligations as credit licensees.[2]
Lessons for Franchisors
This case sends several clear warnings to franchisors, particularly those operating in heavily regulated sectors.
1. Franchisors can inherit compliance risk
Even where franchise agreements allocate legal responsibility to franchisees, courts may find franchisors liable under the knowing involvement provisions where they design, control or endorse the systems used in trading.
Any franchisor who exports legal documentation for use by franchisees must ensure it is compliant.
2. Contract form cannot preclude commercial reality
Attempts to classify products or relationships through artificial drafting will not shield franchisors.
Courts will consider how agreements operate in practice, and if marketing, training, and staff conduct promise outcomes inconsistent with contractual terms, those terms may be ignored.
3. Compliance must be systemic, not superficial
The Court’s criticism extended to Rent4Keeps’ failure to embed compliance through, centralised oversight, standardised training or audit and enforcement mechanisms.
4. Consumer-facing branding creates legal expectations
Names such as “Rent4Keeps” were viewed as affirmative representations. Franchisors must ensure brand identity aligns with legal reality. Where customers are led to believe they are acquiring ownership or credit, the law may classify it accordingly.
If wish to discuss the above or any other legal matters pertaining to franchising further, please contact:
Alicia Hill
Principal
T: +61 3 9611 0180 | M: +61 484 313 865
E: ahill@sladen.com.au
