Australia: ACCC v Ultra Tune: Three lessons for franchisors

In a recent Federal Court decision, ACCC v Ultra Tune Australia Pty Ltd [2019] FCA 12 (ACCC v Ultra Tune), Ultra Tune Australia Pty Ltd (Ultra Tune) was ordered to pay a pecuniary penalty of over $2.6 million for breaching the Franchising Code of Conduct 2014  (Cth) (Code) and sections 18 and 29(1) the Australian Consumer Law (ACL).

This judgment has a significant relevance for the franchising industry for two main reasons:

  1. It is the first case to interpret the phrase ‘sufficient detail’ in clause 15(1)(b) of the Code, explaining the level of information franchisors need to include in financial statements provided to franchisees.
  2. The Australian Competition and Consumer Commission (ACCC) prevailed with its claim that the franchisor had failed to act in good faith – potentially signalling the likelihood that the ACCC will seek to rely on this provision in future actions under the Code.

As the scrutiny on franchisors continues to increase, significant monetary penalties and reputational damage may arise for a franchisor’s non-compliance with its obligations under the Code.

Background

Ultra Tune is a franchisor with a national network of over 200 franchises across New South Wales, Victoria, Queensland and Western Australia, providing motor vehicle engine repair and maintenance services.

In 2015, Ultra Tune was approached by a prospective franchisee, Mr Ahmed. Mr Ahmed met with Ultra Tune’s NSW State Manager on multiple occasions, ultimately culminating in Mr Ahmed agreeing to begin the process to purchase the Ultra Tune franchise in Parramatta. Mr Ahmed also paid Ultra Tune what he understood to be a refundable deposit before being provided with the documentation Ultra Tune was required by the Code to provide to him.

During their meetings and other various correspondence, Ultra Tune (via senior employees) made critical oral and written representations to Mr Ahmed about rent, profits and the age of the Parramatta franchise. Upon receiving further information through formal documentation, Mr Ahmed realised that the representations made by Ultra Tune were inaccurate and decided he would not proceed with the purchase of the franchise.

Mr Ahmed subsequently requested the return of his deposit, minus costs for the training course he had already attended. Ultra Tune asserted that the money had already been spent and would not be refunded. Upon receipt of a complaint from Mr Ahmed, the ACCC launched an extensive investigation into Ultra Tune’s general compliance with the Code and treatment of prospective franchisees. The ACCC’s investigation found multiple suspected breaches of the Code and the ACL which it pursued in the Federal Court.

Sufficient Detail and Meaningful Information

Among the breaches of the Code, Justice Bromwich held that Ultra Tune, in submitting no more than bare financial statements for its five marketing funds, was in breach of its reporting obligations. These were in essence accounting profit and loss statements. Clause 15(1)(b) of the Code requires statements to include ‘sufficient detail of the fund’s receipts and expenses so as to give meaningful information about sources of income and items of expenditure, particularly with respect to advertising and marketing expenditure’ (emphasis added).

His Honour held that a mere ‘bookkeeping exercise’ would not suffice and the obligations must be read and understood in the context of clause 31(3), namely that the Code ‘seeks to promote transparency and accountability in the way that marketing fees are used by a franchisor’.1 The financial statements must equip the franchisee, and not just their accountant, with knowledge of ‘what the income and expenses of the fund are for the purpose of making some meaningful assessment of whether that use is appropriate’.2

Further general observations made by Justice Bromwich about the level of detail required for compliance include:

  • descriptions of expenditure should not be in bare and general terms (Ultra Tune’s use of the description ‘Promotion & Advertising – Television’ was held to be insufficient);
  • different items or categories of expenditure may require different levels of detail;
  • generally, more significant expenses will be more important to franchisees and require more detail;
  • greater detail is required for expenditure on advertising and marketing, as these are specifically emphasised in clause 15(1)(ii);
  • information is meaningful if it enables franchisees to understand how, when and on what money from the fund was spent;
  • content and form of statements must make sense to an ordinary reader (a franchisee), rather than just an accounting professional; and
  • the availability of other sources of information (such as company bulletins and publically available marketing campaigns) is irrelevant as the Code requires that sufficient detail be included in the financial statement itself.

Good Faith

Prior to this case, the obligation to act in good faith in clause 6 of the Code was untested. Justice Bromwich drew from judicial commentary in other contexts.

He described acting in good faith as exercising power in a reasonable manner, where the quality of the conduct is not ‘capricious, dishonest, unconscionable, arbitrary or the product of a motive which was antithetical to the object of the contractual power’.3 Further in the franchising context, his Honour added that the focus of the obligation in the Code ‘should ordinarily be on a franchisor’s use of powers and opportunities available by reason of the franchise relationship’.4

The ACCC asserted that prohibited conduct is that which ‘harms the franchisee where such conduct is not necessary for the protection of the franchisor’s interests’.[5] The ACCC contended that the following conduct displayed by Ultra Tune and its senior employees breached the obligation to act in good faith:

  • failure to honestly disclose information;
  • misrepresentations;
  • pressure on prospective franchisee for payment before providing any of the required documents;
  • treating payments as non-refundable without making this clear;
  • immediate expenditure for signage and equipment without any apparent need for urgency; and
  • failing to repay money.

Aspects of the conduct that breached the obligation to act in good faith also amounted to contraventions of sections 18 (misleading or deceptive conduct) and 29(1) (misrepresentations) of the ACL.

Implications

The ACCC is demonstrating an increasing propensity to take enforcement action in relation to non-compliance with the Code. Ultra Tune received a pecuniary penalty comprised of:

  • $1.1 million for the disclosure obligation contraventions of the Code; and
  • $1.504 million for the breaches relating to its conduct towards Mr Ahmed.

The pecuniary penalty relating to conduct towards Mr Ahmed included the maximum penalty of $54,000 for breaching the obligation in the Code to act in good faith. In addition to the pecuniary penalty, Ultra Tune were ordered to pay the ACCC’s costs and refund all money paid by Mr Ahmed.

The conduct of the franchisor and its senior employees were particularly egregious in this case, with Justice Bromwich finding that evidence had been fabricated in some instances to support Ultra Tune’s assertions.

Three lessons for franchisors

The case provides critical lessons for franchisors, including in relation to some basic compliance steps. Franchisors must ensure that:

  1. They are in a position to comply with all obligations of the Code in a timely manner (e.g. disclosure documents are updated within 4 months of the end of the franchisor’s financial year). Justice Bromwich found that failing to provide the financial statements on time significantly impacted franchisees’ ability to understand fundamental aspects of the franchise.
  2. Financial statements for marketing or other cooperative funds are more than bare accounting statements. The statements must provide a franchisee with sufficient detail and meaningful information to allow the franchisee to assess whether the expenditure is appropriate.
  3. They implement an extensive compliance training program and promote a corporate culture conducive to compliance. This is particularly important for senior employees who are likely to engage with prospective and existing franchisees.

Footnotes

1 ACCC v Ultra Tune Australia Pty Ltd [2019] FCA 12, 31 [86].

2 ACCC v Ultra Tune Australia Pty Ltd [2019] FCA 12, 31 [88].

3 Virk Pty Ltd (in liquidation) v YUM! Restaurants Australia Pty Ltd [2017] FCAFC 190, [164].

4 ACCC v Ultra Tune Australia Pty Ltd [2019] FCA 12, 105, [358].

5 ACCC v Ultra Tune Australia Pty Ltd [2019] FCA 12, 106 [359].

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Chambers Asia Pacific Awards 2016 Winner – Australia
Client Service Award
Employer of Choice for Gender Equality (WGEA)

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Sign Up
Gain free access to lawyers expertise from more than 250 countries.
 
Email Address
Company Name
Password
Confirm Password
Country
Position
Industry
Mondaq Newsalert
Select Topics
Select Regions
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions