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FINE TUNING FRANCHISING CODE COMPLIANCE

The recent commencement of legal proceedings by the Australian Competition & Consumer Commission in the Federal Court of Australia against Australia’s second largest motor repair organisation, Ultra Tune, for failing to provide marketing fund financial statements and auditor’s reports to franchisees follows soon after the recent fine imposed on Domino’s Pizza for failing to comply with the Franchising Code of Conduct (Code) requirements to provide a marketing fund financial statement and auditor’s reports to franchisees within a specified time limit.

Domino’s Pizza and Ultra Tune are large franchisors. The fact that the ACCC has acted against these franchisors emphasises the importance to franchisors of ensuring that they have a system in place for the regular review of their level compliance with the Code.

Domino’s Pizza was fined for the delay in providing the 2015-16 financial year marketing fund financial statement and auditor’s report to its franchisees within the time limit imposed by the Code. Clause 15 of the Code requires the preparation of a marketing fund annual financial statement within 4 months of the end of the last financial year. If an audit of the financial statement is required, this must also be done within 4 months of the end of the last financial year. The financial statement and, if required, the audit report, must be given to franchisees within 30 days of their preparation. Audit reports must be prepared unless at least 75% of franchisees vote to relieve the franchisor from this obligation.

The ACCC media release on 19 May 2017 concerning Ultra Tune asserts that the franchisor failed to provide to its franchisees marketing fund financial statements and audit reports for three financial years.

The ACCC stated in relation to both these cases that it was a current enforcement priority to ensure that small businesses receive the protection of industry Codes (such as the Franchising Code of Conduct). Franchisors need to take into account these cases and the ACCC’s focus on Code compliance.

There is a significant risk to franchisors in failing to ensure that marketing fund financial statements, and audit reports if these are required, are sent to franchisees within the time limits required by the Code.

If franchisors as large as Ultra Tune which has 275 centres in Australia and Domino’s Pizza have failed to comply with the Code even if this results from an oversight, then it should be a wake-up call for other franchisors to pay attention to the issue of compliance with the Code in relation to marketing funds and to fine tune their compliance review processes.

Franchisors who are concerned that they have failed to comply with the Code should seek legal advice and take steps to ensure in future that they have a system in place that minimizes the risk of non-compliance with the Code.

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