Insights / September 30th, 2019

Significant and meaningful: Franchisor disclosure obligations

Three justices of the Federal Court of Australia have upheld a January judgment that found Ultra Tune Australia Pty Ltd (“Ultra Tune”) had failed to act in good faith, made false or misleading representations and had failed to meet its disclosure obligations pursuant to the Franchising Code of Conduct (“Franchising Code”).

In January 2019, Justice Bromwich found that Ultra Tune had failed to act in ‘good faith’ as required by the Franchising Code, had made misleading or false representations to potential franchisees, and failed to provide disclosure documents to franchisees.

A more comprehensive summary of Justice Bromwich’s judgment, alongside a summary of a similar findings against car wash franchisor Geowash Pty Ltd.

Ultra Tune lodged an appeal against the $2.6 million penalty imposed after trial and the findings that it had not made adequate disclosures in how its marketing fund was used.

In the first instance, Justice Bromwich had held that Ultra Tune’s marketing fund related disclosures had failed to provide “sufficient detail” and “meaningful information” to franchisees. His Honour, found that Ultra Tune had failed to meet its obligations under clause 15 of the Franchising Code as merely providing general categories of expenditure did not provide franchisees with sufficient information.

The Full Federal Court considered the obligations that the Franchising Code placed on Ultra Tune and arrived at the same conclusion, reiterating the position of the trial judge and stating that information provided to franchisees must possess “some explanatory force and permit meaningful insights to be gained by the franchisee”. The Full Federal Court further advised that “a franchisor would be well advised to err on the side of candour” when preparing disclosure documents and providing franchisees with information related to any franchise system.

ACCC Deputy Chair Mick Keogh stated that “[t]he Full Federal Court’s decision confirms that franchisors must provide meaningful information to franchisees about marketing fund expenditure”. The purpose of the Franchising Code with respect to this clause is to ensure that franchisees are provided with sufficient information regarding how the marketing fund is managed and used. This is especially important given the franchisees contribution to the marketing fund.

However, the Full Federal Court disagreed with the way the trial judge calculated the initial $2.6 million pecuniary penalty for the breaches of the Franchising Code and Australian Consumer Law. The Full Federal Court subsequently reduced the pecuniary penalty to $2.014 million, and found that although the failure to provide sufficient information was not “deliberate”, it did result from Ultra Tune’s “egregious inadvertence” to its obligations.

The appeal judgment reiterates the importance of franchisors adhering to the Franchising Code and ensuring that franchisees are given sufficient detail and meaningful information about the use of marketing funds.

In the context of the overarching obligations of good faith between the parties, there is the requirement for a franchisor to cooperate with a franchisee or potential franchisee – this includes in the disclosure of relevant information in the Disclosure Document required by the Franchising Code.

If you have any questions about how these obligations may apply to you, please do not hesitate to contact a member of our Corporate and Commercial Team.

This publication has been prepared for general guidance on matters of interest only and does not constitute professional legal advice. You should not act upon the information contained in this publication without obtaining specific professional legal advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication and to the extent permitted by law, Cowell Clarke does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting or refraining to act in relation on the information contained in this publication or for any decision based on it.