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$2.6m penalty for franchisor infringement

$2.6m penalty for franchisor infringement

01 Feb 2019

$2.6m penalty for franchisor infringement
WRITTEN BY
Karina McDougall
Karina McDougall
Senior Associate

$2.6m penalty for franchisor infringement

01 Feb 2019

In proceedings commenced by the ACCC, the Federal Court has ordered Ultra Tune Australia Pty Limited (Ultra Tune) to pay a massive $2,604,000 penalty after it was found to have committed multiple breaches of the Franchising Code (Code) and the Australian Consumer Law (ACL).  

The case arises out of negotiations which took place between Ultra Tune and Mr Nakash Ahmed in 2015.  At the time Mr Ahmed was attempting to buy an Ultra Tune franchise in Parramatta.   

The Court found that Ultra Tune breached the ACL because it made false or misleading representations to Mr Ahmed regarding the price, ongoing rent and age of the franchise.  The company also told Mr Ahmed that the $33,000 deposit paid by him was refundable, when it in fact it wasn’t.  

The Court found that Ultra Tune breached the Code because it failed to prepare marketing fund statements within the required timeframes, failed to provide these statements and audit reports to franchisees, and failed to include sufficient detail in the statements.

These were all serious findings against Ultra Tune, but still - it did not end there.  In addition to these breaches, Ultra Tune was found to have attempted to deceive the Court by relying on documents purportedly sent to Mr Ahmed.  The attempted cover-up put Ultra Tune in even more hot water, with the judge observing that “the cover up that Ultra Tune attempted reflects a significantly heightened need for deterrence”. 

In addition to the huge penalty, Ultra Tune was also ordered to pay Mr Ahmed’s deposit back to him together with interest.

Key takeaways

This was the first time the ACCC had brought proceedings against a franchisor over Code obligations for franchisors to act in good faith in their dealings with franchisees.  

The case sends a strong message to franchisors that the non-compliance with the Code and the ACL may result in significant penalties.  In addition, the financial impact of these court actions includes legal costs and lost business from negative publicity arising out of the proceedings.

It also shows that the ACCC will take complaints regarding breaches of the Code and the ACL seriously and the regulator is prepared to take court action in respect of those breaches.  Franchisors should be aware of their obligations under the Code and the ACL, and ensure that they have appropriate policies and procedures in place to avoid any breaches.  

Businesses should seek legal advice if they have any concerns regarding compliance with the Code or the ACL. If you require advice or assistance on any matters regarding the Code or the ACL, please contact Karina McDougall from Australian Business Lawyers & Advisors on 1300 565 846.

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