14 February 2019
In a recent Federal Court decision, ACCC v Ultra Tune Australia Pty Ltd  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:
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.
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.
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’. 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’.
Further general observations made by Justice Bromwich about the level of detail required for compliance include:
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’. 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’.
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’. The ACCC contended that the following conduct displayed by Ultra Tune and its senior employees breached the obligation to act in good faith:
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.
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:
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.
The case provides critical lessons for franchisors, including in relation to some basic compliance steps. Franchisors must ensure that:
 ACCC v Ultra Tune Australia Pty Ltd  FCA 12, 31 .
 ACCC v Ultra Tune Australia Pty Ltd  FCA 12, 31 .
 Virk Pty Ltd (in liquidation) v YUM! Restaurants Australia Pty Ltd  FCAFC 190, .
 ACCC v Ultra Tune Australia Pty Ltd  FCA 12, 105, .
 ACCC v Ultra Tune Australia Pty Ltd  FCA 12, 106 .
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