27 February 2019
Franchisors need to exercise a degree of care with the franchise sales process and comply at all times with the disclosure requirements of the Franchising Code of Conduct. Recently, the Federal Court has handed down a landmark decision against franchisor Ultra Tune for failure to comply with “minimum franchisor obligations”.
The decision provides insight into the obligations of franchisors with regard to the standard of detail required in disclosure documents and clarifies the requirement to act in ‘good faith’. Further, the decision highlights the importance for franchisors of meeting the statutory timeframes imposed in relation to disclosure obligations, as well as the strict penalties associated with misleading representations and intentionally covering up breaches of the Franchising Code of Conduct and Australian Consumer Law (ACL).
How does it affect you?
Breakdown of the decision
The decision concerned Ultra Tune making a number of representations to a prospective franchisee, Mr Ahmed, who paid a refundable deposit. An investigation by the ACCC found multiple breaches, which it pursued in the Federal Court. Ultra Tune denied the representations at trial with manufactured evidence, and downplayed the seriousness of the conduct after later admitting to the breaches.
Bromwich J of the Federal Court agreed with all breaches alleged and imposed a penalty totalling $2,604,000. The two main categories of contravention were a breach of disclosure obligations and illegal treatment of a prospective franchisee.
While the obligation to act in good faith was untested, the court held that Ultra Tune’s conduct breached the Code and amounted to contraventions of the ACL. The misrepresentations were in respect of the franchise price, the rent of premises, the age of the franchised business and the terms applicable to the deposit and its refund.
His Honour clarified the requirement of ‘sufficient detail’ in Clause 15(1)(b) of the Code and held that it was breached in this case as the information was in bare, general terms and did not have any ‘explanatory force’ or permit meaningful insight for the franchisee.
The decision – and the considerable penalty – is a timely reminder for franchisors to ensure disclosure documents and internal processes meet the high standards required at law. If a breach is suspected or identified, it is important to be open and honest and take steps immediately to rectify the problem.
Authors: Trent Taylor & Friedrich Kuepper
Trent Taylor, Partner
T: +61 7 3135 0668
William Khong, Partner
T: +61 3 9321 9883
Darren Pereira, Partner
T: +61 2 8083 0487
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