The consumer watchdog has issued a stern warning to franchisors failing to act in good faith with franchisees following a whopping $2.6 million fine against car-repair business Ultra Tune.
Last Friday the Federal Court ruled that Ultra Tune had breached both the Franchising Code of Conduct by failing to act in good faith with franchisees and Australian Consumer Law by making false or misleading representations.
The ACCC alleged Ultra Tune made false or misleading representations about the nature of a franchise business to a prospective partner in 2015, including the price of the franchise itself.
The case was the first time the ACCC has brought proceedings against a franchisor over franchise code obligations for franchisors to act in good faith in their dealings with franchisees.
Experts say the ruling is likely to encourage the regulator to pursue other franchisors over possible code breaches, particularly in relation to disclosure obligations, which have emerged as a key concern in evidence provided to an ongoing Senate inquiry into the sector.
Jenny Buchan, a UNSW Business School professor and franchise law expert, tells SmartCompany the ruling is a “long time coming”.
Buchan says the ruling helps to clear up some legal uncertainty over good faith provisions in the franchising code which have previously provided franchisors with legal wiggle room.
“If the judge writes up the full judgement explaining the reasons it will be hugely beneficial to the franchising community,” she says.
Well-documented cases of other franchisors failing to act in good faith in franchisee dealings could also be followed-up on by the ACCC, Buchan says.
“The [ACCC] will be looking very carefully at complaints received about the same conduct.”
Commercial lawyer Richard Pragnell of Viridian Lawyers says the action makes it clear the ACCC is taking a tougher approach to franchisors.
“The obligation of good faith in contracting is something that has been picking up legal gravitas lately,” he tells SmartCompany.
“I’d encourage franchisors to have a close look at their sales processes, there is often a disconnect between the salespeople on the ground and the lawyers who prepare the contracts.”
In a statement about the case, ACCC deputy chair Mick Keogh said franchisors are often in a stronger position during negotiations with potential partners.
“Franchisors often have the stronger bargaining position in their dealings with franchisees, which is why compliance with the franchising code and the Australian Consumer Law is so important,” he said.
“This outcome should be a strong reminder for franchisors to meet their disclosure obligations or face serious consequences.”
Ultra Tune, which has more than 200 franchises across the country, was also found to have attempted to mislead the Court in its defence by arguing it sent disclosure documents to the prospective franchisee.
“The cover-up that Ultra Tune attempted reflects a significantly heightened need for deterrence, in relation to conduct that was already a most serious and fundamental breach of the franchising code in taking the deposit in the first place, reflecting as it does Ultra Tune’s attitude in relation to its contravening conduct,” Justice Bromwich said.
In a statement an Ultra Tune spokesperson said it has recieved preliminary legal advice and is considering an appeal.
“In light of adverse findings made by the Court about evidence on behalf of the company, executive chairman Sean Buckley has decided to engage an independent outside lawyer (who has had no previous association with the company) to investigate and review all aspects of the case, including evidence given on behalf of the company and the carriage of the case by the company’s former lawyers. The independent lawyer will report findings directly to Mr Buckley,” the spokesperson said.
“The case touched on a number of issues including, inter alia, the level of detail provided in Ultra Tune’s marketing fund accounts where the ACCC decided to run a test case. At all times Ultra Tune had engaged and relied on its external advisors to ensure compliance with the Code’s marketing fund accounting requirements.
“The Franchising Code of Conduct did not prescribe the level of detail which the ACCC submitted to the Court should be provided in marketing fund accounts.
“Nor had the ACCC published any guidelines consistent with the ACCC’s submissions to the Court. The company believes it is regrettable that the ACCC decided to regulate by running a test case, rather than publishing appropriately detailed regulatory guidelines for franchisors and their advisors to follow.”
This article was updated at 12:09 PM AEDT 21 January to include a statement from Ultra Tune.