In two separate judgments delivered in January and February of 2019, the Federal Court has explored the previously unlitigated duties of good faith that a franchisor and franchisee owe each other under the Franchising Code of Conduct. The decisions of the Court represent the need for franchisors and franchisees to engage with each other honestly, disclose information where required, and act in compliance with all statutory obligations and contractual agreements.
The Australian Competition and Consumer Commission (“ACCC”) has been successful in seeking judgments against two franchisors for breaches of the Franchising Code of Conduct and the Australian Consumer Law.
Justice Bromwich of the Federal Court of Australia ordered a pecuniary penalty of $2.6 million against Ultra Tune Australia Pty Ltd for making false or misleading representation in breach of the ACL and for failing to act in good faith pursuant to the Franchising Code of Conduct.
Geowash Pty Ltd, a car wash franchisor now in voluntary administration, was found by Justice Colvin in the Federal Court of Australia to have been acting unconscionably, to have made false or misleading representations, and to have failed to act in good faith in breach of the Franchising Code of Conduct. The penalties against Geowash Pty Ltd and their director are pending further proceedings.
ACCC v Ultra Tune Australia Pty Ltd
Ultra Tune Australia Pty Ltd (“Ultra Tune”) is the franchisor for approximately 200 car repair franchisees across Australia. The ACCC alleged that Ultra Tune had breached both the current Franchising Code of Conduct and its predecessor and had made misleading or false representations to potential franchisees in breach of the Australian Consumer Law.
Ultra Tune was alleged to have made numerous misleading or false representations to prospective franchisees as to the profitability and expenses of franchises. The ACCC also alleged that Ultra Tune failed to provide disclosure documents to the prospective franchisees in accordance with their obligations under the Franchising Code of Conduct.
The ACCC noted that this case was their first attempt at pursuing an entity for a breach of the ‘good faith’ obligations in the current Franchising Code of Conduct. Justice Bromwich, in finding against Ultra Tune, accepted the ACCC’s submission that the obligation of good faith is one that requires a franchisor to:
not use the powers and opportunities available to it to the detriment of a franchisee in the absence of any objective legitimate interest in doing so; and must co-operate to the extent possible with a franchisee or potential franchisee, providing that such co-operation is not to the detriment of the franchisor.
The good faith obligations were also taken to require ‘consideration by the franchisor of the position and interests of the franchisee’. Furthermore, it was held that conduct which is not necessary for the protection of the franchisor’s interests and harms a franchisee or prospective franchisee falls afoul of the good faith obligations.
By making numerous misleading statements and failing to provide all relevant information in a timely and accurate manner, Justice Bromwich found that Ultra Tune had failed to meet the standards required by the Franchising Code of Conduct’s good faith clauses and had breached the Australian Consumer Law.
The Federal Court imposed a $2.6 million pecuniary penalty for the breaches of the Franchising Code of Conduct and Australian Consumer Law. Justice Bromwich also strongly criticised Ultra Tune for fabricating evidence and attempting to mislead the Court in the course of its defence.
ACCC v Geowash Pty Ltd (Subject to Deed of Company Arrangement) (No 3)
Geowash Pty Ltd (“Geowash”) offered car washing franchises between 2013 and 2016. The franchising agreement required franchisees to pay for the fit-out costs associated with starting the business and purchase the required equipment from Geowash. There was considerable variability in the costs associated with the fit-out of franchises due to the nature of each franchise site.
The ACCC alleged that Geowash made misleading statements about monthly earnings, the corporate clients of Geowash, and the establishment costs for a franchise. The ACCC alleged that both Geowash and its directors were in breach of the prohibition on misleading and deceptive conduct, and unconscionable conduct in the Australian Consumer Law. This same conduct was alleged to have been a breach of clause 6 of the Franchising Code of Conduct; the obligation to act in good faith.
Justice Colvin, in considering the alleged breaches of the Australian Consumer Law and Franchising Code of Conduct, adopted the interpretation of the good faith obligations employed by Justice Bromwich’s judgment against Ultra Tune.
Geowash was found to have repeatedly misrepresented invoices by stating that they were for fit-out and start-up expenses, while in fact the fees were for Geowash’s expenses and franchise commissions. Justice Colvin found these arrangements ‘went beyond a failure to observe the terms of the franchise agreement’ and amounted to unconscionable conduct in addition to the breaches of the good faith obligations in the Franchising Code of Conduct.
These cases represent the ACCC’s renewed activity enforcing franchisor obligations under the Franchising Code of Conduct. These cases represent the first attempts by the ACCC to litigate on the good faith obligations in the Franchising Code of Conduct and have provided colour to a previously unlitigated legal obligation. The primary take away from these cases is the need for a franchisor to be open with potential and current franchisees, disclose all information in an honest and timely manner, comply with the franchising agreements in place, and ensure that all statements are accurate and clear.
For assistance in complying with your obligations under the Franchising Code of Conduct, get in touch with Megan Jongebloed.