Franchising – Time For Fair Play

One of the more important priorities for the Australian Competition and Consumer Commission (“ACCC”) with respect to the franchise industry is to ensure ‘fair play’ for small business. Because of increased emphasis on ‘fair play’, the ACCC has carried out numerous investigations, some of which have resulted in prosecution of franchisors.

In one case involving Ultra Tune Australia Pty Ltd (“Ultra Tune”), the Federal Court found that Ultra Tune had breached its disclosure obligations and imposed a penalty of $2.6 million on it. Under clause 15 of the Franchising Code, a franchisor is obliged to disclose ‘sufficient detail’ in financial statements. The court observed that information provided to the franchisee must be “useful and practical, not merely minimal accounting information” and it must allow a franchisee to make a “meaningful assessment” of whether the income and expenses of the fund (set up under the franchise agreement) are appropriate.

In general, the “more significant an expense is, the more important it will be to a franchisee and therefore the greater the level of detail that will be required.” The court found that the majority of Ultra Tune’s expenditure was described by only a single line item for “Promotion and Advertising – Television” and that this bare description failed to meet the requisite standard.

The court also examined the good faith obligations of the franchisor under the Code and found that Ultra Tune failed to meet the requisite standard, for example failing to honestly disclose information; making misrepresentations; pressuring a franchisee to make payment before providing proper documentation.

On 14 March this year, a Senate Committee published a report into the franchising sector stating that the current regulatory framework was not sufficient to properly protect franchisees. The report emphasised the disparity in power between franchisors and franchisees. The Committee has recommended far reaching changes to the Franchising Code.

It therefore seems likely that the ACCC will continue to pursue ‘unfair play’ on the part of franchisors and that there will likely be further enhanced legislation to protect the franchisor.

If you are considering entering into a franchise, it is strongly recommended that you consult your solicitor.

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