The franchise industry has been under considerable scrutiny in recent times, evidenced by the 2018 Senate Inquiry and the increased activity of the Australian Competition and Consumer Commission (ACCC) in investigating and prosecuting franchise companies for non-compliance with the Franchising Code of Conduct (FCC).[i] Of note is the recent Federal Court of Australia decision, Australian Competition and Consumer Commission v Ultra Tune Australia Pty Ltd.[ii]
Ultra Tune Australia Pty Ltd (Ultra Tune) is one of the largest independent automotive service and repair franchises in Australia, with a network expanding across Queensland, New South Wales, Victoria and Western Australia.
In early 2015, Mr Nakash Ahmed, applied to purchase an existing franchise from Ultra Tune. In making his inquiries, Ultra Tune made certain representations as to the history of the store and franchise system. Mr Ahmed was also required to pay the sum of $33,000 upfront for equipment and training costs prior to being provided with relevant disclosure documents and the franchise agreement. Once Mr Ahmed commenced training, he became aware of the actual likely expenses of the franchise and took steps to immediately withdraw his application and sought a refund of the $33,000 of which Ultra Tune refused.
In late 2015, Mr Ahmed took his complaint to the ACCC which resulted in a thorough investigation being undertaken into Ultra Tune’s work practices and consequently the commencement of Federal Court of Australia proceedings for various breaches of the FCC, including the good faith obligation required by section 6.
What is the Good Faith Obligation?
In essence, the good faith obligation, which is implied within commercial dealings, requires the parties to a contract to act with sincere belief and motive, without malice or the desire to defraud others.[iii]
The Ultra Tune decision has bought this obligation to the forefront, acting as a reminder that franchisors are to act in good faith throughout the entire process of the franchise relationship, including pre-contractual negotiations, performance of the contract, dispute resolution and the end of the agreement.
The common assumption made with respect to the good faith obligation is that a party is, by virtue of the obligation, to act in the interests of another. However, the good faith obligation only requires that a party have due regard to the interests and rights of that other party. A party will not be in breach of its good faith obligation in circumstances where a party is acting in their own legitimate commercial interests (section 6(6) of the FCC).
Consequences for Ultra Tune
Ultra Tune’s actions provide a good example of conduct that shows a lack of good faith. Some of this indicative conduct includes:
(a) failing to disclose an accurate history of the franchise;
(b) making misrepresentations as to the longevity of the franchise and fees payable;
(c) exerting pressure on a potential franchisee to make financial contractual commitments without first providing documentation relevant to the purchase;
(d) treating the deposit as non-refundable without advising the franchisee that it would in fact be so;
(e) misusing funds for unnecessary expenditure; and
(f) failing to repay moneys owing to a franchisee.
The Ultra Tune decision acts as a sound reminder to all franchisors and franchisees alike that compliance with the FCC is mandatory and that any breach can have significant penalties.
As a consequence of Ultra Tune’sbreach of the FCC, the Court ordered that the company pay the sum of $2,604,000 to the ACCC as a pecuniary penalty as well as refund the $33,000 plus interest to Mr Ahmed.
Implications for You
It is critical that franchisors be transparent and upfront from the beginning of negotiations with prospective franchisees. This can be achieved by providing potential franchisees with a prospectus that includes a copy of the FCC, the franchisor’s disclosure document and the franchise agreement upon their initial enquiry.
There are a number of key timeframe requirements and cooling off periods established by the FCC which must be strictly adhered to. If you are a franchisor and are concerned as to whether you are compliant with your obligations under the FCC our office is equipped to assist you.
For those who are prospective or current franchisees, it is important that you understand your rights under the FCC. The good faith obligation is a mutual one required by both parties and as such it is essential that you provide accurate information to your franchisor throughout the duration of the relationship.
The FCC requires that you obtain legal advice before you execute any franchising documents. Our firm would be happy to assist you in complying with this obligation and provide you with comprehensive advice as to your rights and obligations under the proposed franchising agreement.
[i] The Franchising Code of Conduct can be found in Schedule 1 of the Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (Cth).
[ii]  FCA 12.
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