INSIGHT

ACCC's good result in bad faith claim

Industrials Intellectual Property Patents & Trade Marks

In brief

The ACCC recently brought its first two cases alleging a breach of the good faith obligation in the Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (the Franchising Code). In each instance, the ACCC successfully established both a lack of good faith and breaches of the Australian Consumer Law. Lawyer Edward Thien reports.

Background

Under the Franchising Code, there is an obligation for parties to a franchise agreement to act in good faith towards each other 'in respect of any matter arising under or in relation to' the agreement and the Franchising Code. Failure to meet that obligation, albeit by different means, lay at the heart of both cases brought by the ACCC, namely ACCC v Ultra Tune Australia Pty Ltd [2019] FCA 12 (Ultra Tune) and ACCC v Geowash Pty Ltd (No 3) [2019] FCA 72 (Geowash).

What is good faith?

Whilst the Franchising Code provides some guidance as to the bounds of the good faith requirement, the actual meaning of 'good faith' is still determined by common law. A thorough examination of past cases considering 'good faith' ensued in each case, with Geowash distilling seven principles to inform its meaning in the Franchising Code:

  1. Good faith requires the parties to observe a 'normative standard' in their dealings. 
  2. Good faith requires the parties to act 'honestly and with fidelity to the bargain' struck.
  3. Good faith requires the parties to act 'co-operatively in matters related to performance'.
  4. Good faith does not require a party to 'subordinate its legitimate interests', but the party is still required to consider the legitimate interests of the other party.
  5. A party whose conduct is 'dishonest, capricious, arbitrary', antithetical to the object of the agreement or Franchising Code, or 'motivated by bad faith' will breach the obligation.
  6. Objectively unreasonable conduct does not breach the obligation, although it is evidence to support a claim that a party is not acting in good faith.
  7. Whether a party has breached the obligation is to be considered in light of its sophistication and commercial power.

Application of good faith requirement

In Ultra Tune, the ACCC successfully established that Ultra Tune had failed to comply with its obligation to act in good faith in each of the following circumstances:

  1. Failing to advise a franchisee that its deposit was non-refundable, whilst actively representing that it was refundable;
  2. Pressuring a franchisee to pay a deposit before any disclosure documents were provided;
  3. Incorrectly representing to a franchisee the true cost and profitability of the business; and
  4. Failing to refund the deposit when a franchisee decided against taking up a franchise opportunity.

Similarly, in Geowash, a failure to act in good faith was found in the following circumstances:

  1. Negotiating payments that were said to be the costs required for establishing the site, conducting the fit-out and purchasing the equipment, but were actually just based on the maximum the prospective franchisee could afford;
  2. Requiring payments of lump sums to which Geowash was not entitled;
  3. Providing vague responses when pressed by franchisees as to what costs were for; and
  4. Pressuring potential franchisees to pay additional amounts by threatening they would otherwise risk losing the opportunity to secure a site.

Consequences of breaching the good faith requirement

In circumstances where an obligation is owed to all franchisees, a single breach can amount to separate breaches for each and every franchisee. For Ultra Tune, then, some of its conduct amounted to 185 distinct breaches per offending act (with damages adjusted to ensure they were not excessive and disproportionate). Ultra Tune's conduct with respect to one specific franchisee, however, was argued to be such a serious breach of the good faith obligation that it attracted the maximum possible penalty of 300 penalty units (or $54,000 as it was at the time). In all, a penalty of $2,604,000 was imposed.

In Geowash, declarations were granted in relation to each of the contraventions, and the parties were given leave to make submissions regarding the appropriate pecuniary penalties to be issued.

It should be noted, the conduct of both Ultra Tune and Geowash in breach of their good faith obligations was also the basis upon which the court found they had breached the Australian Consumer Law.