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No Excuses! Franchisors must Comply with Statutory Deadlines under the Franchising Code of Conduct

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On 1 March 2024 the Federal Court of Australia delivered judgment in the matter of Australian Competition and Consumer Commission v Ultra Tune Australia Pty Ltd (No 3) [2024] FCA 156, and found the franchisor Ultra Tune Australia Pty Ltd (‘Ultra Tune’) guilty of contempt of court.

Background

In 2019 the court found that Ultra Tune had breached its obligations under the Australian Consumer Law and Franchising Code of Conduct (‘Code’).

Compliance orders were made on 4 March 2019 which required Ultra Tune to, amongst other matters, refrain from contravening provisions of the Franchising Code and to establish and observe a Franchising Code compliance program.

In 2022 the ACCC commenced proceedings alleging that Ultra Tune had contravened the compliance orders, specifically:

Breach Actual conduct
Failure to update the disclosure document for FY20 prior to 31 October 2020 Late by 10 days
Failure to prepare the Marketing Fund Statement for FY19 prior to 31 October 2019 Late by 7 weeks
Failure to prepare the Marketing Fund Statement for FY2020 prior to 31 October 2020 Late by 8 months
Failure to provide quarterly briefings about the compliance program to the Ultra Tune board of directors No briefings for the June, September and December quarters of 2021

Ultra Tune pleaded guilty to the charges but contended that the non-compliance occurred despite its best efforts and intentions to comply.  Ultra Tune submitted that the pecuniary penalties should be reduced on the basis that:

  1. Ultra Tune and its auditors’ operations were disrupted by the Covid-19 government mandated lockdowns;
  2. its auditor was unwell and caused a delay in finalising the auditor’s solvency statement;
  3. the person with carriage of preparing the Marketing Fund Statement was unfamiliar with the Franchising Code, the franchisor’s accounting systems and had disagreements with the franchisor’s accountants;
  4. Ultra Tune attempted to amend its accounting systems to better prepare the Marketing Fund Statement and financial statements. However, changes to the accounting system proved to be complex and lengthy;
  5. the compliance officer was unwell and could not provide the quarterly reports to Ultra Tune’s board of directors;
  6. the accountants were unfamiliar with Franchising Code requirements and had prepared a deficient Marketing Fund Statement that needed to be corrected.

Outcome and lessons for franchisors

Justice Bromwich did not accept Ultra Tune’s pleadings and fined Ultra Tune a total of $1.5 million.
The court emphasises that franchisors need to have a proactive culture of compliance.

For franchisors, the following key learnings arise from this case:

  1. Franchisors, especially in-house legal teams should be concerned and prioritise Code compliance;
  2. Franchisors must monitor and supervise the completion of compliance tasks. Specifically, franchisors should follow up their accountants, auditors and other professionals to ensure that statutory deadlines will be met. The tardiness of an external professional or the illness of a key compliance person will not excuse non-compliance;
  3. Marketing Fund Statements must be correctly prepared. If a Marketing Fund Statement appears to be deficient (i.e. the income and expenses of the fund are not sufficiently detailed) then the franchisor must instruct their accountants as to the requirements under the Franchising Code;
  4. Franchisor employees should be trained on how to categorise marketing expenses and income for the purposes of preparing the Marketing Fund Statement;
  5. Diarise key deadlines under the Franchising Code.

It is clear from the Ultra Tune case that the courts take a strong view that franchisees must be provided with current, relevant information about the franchisor and the status of the marketing fund.

MST LawyersFranchising Team is highly experienced with advising on Franchising Code and Australian Consumer Law compliance.

If you have questions or require assistance with complying with your obligations under the Franchising Code, contact a member of our Franchising Team on +613 8540 0200 or as follows:

Raynia Theodore: raynia.theodore@mst.com.au

Louise Wolf: louise.wolf@mst.com.au

Esther Gutnick: esther.gutnick@mst.com.au