News & Insights

The Federal Court has handed down a $2,604,000 penalty against Ultra Tune Australia Pty Ltd for breaching the Franchising Code of Conduct and the Australian Consumer Law.

The penalty comes after the Australian Competition and Consumer Commission took action against the national vehicle repair franchise over its dealings with a prospective franchisee.

The Court found that Ultra Tune:

1. failed to act in “good faith” in breach of the Franchising Code;
2. made false or misleading representations in breach of the ACL in its dealings with a prospective franchisee. The representations were made to a prospective partner in 2015 about the price and age of the franchise, the rent and refundability of a $33,000 deposit; and
3. breached the Franchising Code by failing to prepare marketing fund statements within required timeframes, failing to provide these statements and audit reports to franchisees, and failing to include sufficient detail in the statements.

The judgment also noted Ultra Tune’s attempts to mislead the Court in its defence by relying on documents purportedly sent to the prospective franchisee.

Ultra Tune was ordered to repay the $33,000 deposit with interest, and the ACCC was awarded indemnity costs.

What does this mean for franchisors?

This is the first time the ACCC has brought a case against a franchisor over the Franchising Code obligation to act in “good faith” in dealings with franchisees.

The ACCC has indicated that it would continue to take enforcement action when serious breaches of the Franchising Code were identified.

This is a strong warning for franchisors of the need to meet disclosure obligations or risk facing serious consequences.

Significant increases to penalties can be expected.

This case was launched before maximum penalties under the ACL were increased to the greater of $10 million, or three times the value of the benefit obtained, or 10 per cent of annual turnover in the preceding 12 months if the value of the benefit cannot be determined.

The new, higher penalties apply to acts, omissions or offences that occur on or after 1 September 2018. Higher penalties in future cases are anticipated.

 Our tips for compliance:

• Ensure you have proper policies in place.
• Diarise dates for compliance.
• Ensure you have reasonable grounds for making representations about the franchise.

If you are unsure of your obligations under the Franchising Code or have any questions regarding compliance, please contact our Franchising team.

This article was written by Caroline Szylkrot, Law Graduate.