Preparation of marketing fund statements
78 In accordance with cl 15(1) of the Franchising Code, the statements for the 2014-15 and 2015-16 financial years were required to detail all of the relevant marketing fund's receipts and expenses for the previous financial year. Given that Ultra Tune maintained a separate marketing fund for each of the five Ultra Tune regions listed in the table at [15] above, it was required to prepare annual statements for each of those funds. It is not in dispute that for both financial years:
(1) Ultra Tune did so in the form of a profit and loss statement for each region's fund;
(2) had the statements audited; and
(3) provided the statements and auditor's reports to the franchisees.
79 What is controversial, however, is the adequacy of those statements in terms of meeting the standard required by the Franchising Code. In respect of both financial years, the ACCC alleges that the financial statements that were prepared by Ultra Tune did not have "sufficient detail" as specifically required by cl 15(1)(b) of the Franchising Code. Ultra Tune disputes this.
80 Clause 15 of the Franchising Code below provides (emphasis added):
15 Copy of financial statements
(1) If a franchise agreement provides that a franchisee must pay money to a marketing or other cooperative fund, the franchisor must:
(a) within 4 months after the end of the last financial year, prepare an annual financial statement detailing all of the fund's receipts and expenses for the last financial year; and
(b) ensure that the statement includes sufficient detail of the fund's receipts and expenses so as to give meaningful information about:
(i) sources of income; and
(ii) items of expenditure, particularly with respect to advertising and marketing expenditure; and
(c) have the statement audited by a registered company auditor within 4 months after the end of the financial year to which it relates; and
(d) give to the franchisee:
(i) a copy of the statement, within 30 days of preparing the statement; and
(ii) a copy of the auditor's report, if such a report is required, within 30 days of preparing the report.
Civil penalty: 300 penalty units [$54,000].
(2) A franchisor does not have to comply with paragraph (1)(c) in respect of a financial year if:
(a) 75% of the franchisor's franchisees in Australia, who contribute to the fund, have voted to agree that the franchisor does not have to comply with the paragraph in respect of the financial year; and
(b) that agreement is made within 3 months after the end of the financial year.
(3) If a franchise agreement provides that a franchisee must pay money to a marketing or other cooperative fund, the reasonable costs of administering and auditing the fund must be paid from the fund.
81 The question of construction that arises is as to the proper meaning of the expression "sufficient detail" in cl 15(1)(b). This has not been the subject of any previous authority that I have been able to detect or that the parties have raised.
82 It is important to also note that cl 15(1) is evidently related to cl 31, which imposes direct requirements on how marketing fees are to be used. This provides an important contextual basis for understanding a key practical use of the information that is required to be disclosed, informing what information needs to be included to be useful and to achieve the regulatory purpose. Of particular relevance is cl 31(3), which provides:
Despite any terms of a franchise agreement, marketing fees or advertising fees may only be used to:
(a) meet expenses that:
(i) have been disclosed to franchisees under paragraph 15.1(f) of the disclosure document; or
(ii) are legitimate marketing or advertising expenses; or
(iii) have been agreed to by a majority of franchisees; or
(b) pay the reasonable costs of administering and auditing a marketing fund.
83 Ultra Tune prepared its financial statements for both the 2014-15 and 2015-16 financial years for the purposes of cl 15(1) in the form of profit and loss statements for each Ultra Tune region. Those statements were uniform in structure. Each took the form of an ordinary balance sheet, with a limited number of line items listed as either "income" or "expenses" together with dollar figures and percentages reflecting each item's proportion of the overall expenditure. For the most part, the total income of each fund for the 2014-15 financial year was in the order of $6.7 million, with a similar expenditure. The 2015-16 financial year also had similar levels of income and expenditure.
84 Included as expenses in the financial statements were a large number of minor items that generally did not account for more than 20% of the total expenditure of the funds in question. These included items described as "Gift Vouchers", "Printing & Stationary" (sic), "Seminars and Meetings", "Administration Fees", "Fleet Administration" and "Customer Support". In the case of each financial statement, the majority of the relevant fund's expenditure was constituted by a single item, which was described simply as "Promotion & Advertising - Television". For example, in the case of the NSW Metro marketing fund for the financial year 2014-15, this item comprises 76.65% of the total expenditure of the fund.
85 Ultra Tune defends the adequacy of its financial statements, which it says are sufficiently detailed for the purposes of cl 15(1)(b). It says that the reference to "meaningful information" in cl 15(1)(b) does no more than emphasise that what is required is an accounting, not a bookkeeping, exercise. It is said to be sufficient that the figures in each financial statement are classified and recorded such that a franchisee can see what the major sources of income and expenses were. According to Ultra Tune, that is exactly what its statements do. I do not accept these submissions.
86 It may be seen from its terms, and its relationship with cl 31(3), that cl 15(1) seeks to promote transparency and accountability in the way that marketing fees are used by a franchisor. It does so by requiring a franchisor to disclose "sufficient detail" of a fund's receipts and expenses so as to give "meaningful information" to the franchisees about sources of income and items of expenditure, particularly with respect to advertising and marketing expenditure. The ACCC submits that the notion of "meaningful information" conveys at a textual level that the financial statement must have some explanatory force and permit meaningful insights to be gained by the franchisee. I agree.
87 The minimal requirement that Ultra Tune submits is enough would have the effect of denying any real, practical content to the express requirement to give "sufficient detail of the fund's receipts and expenses so as to give meaningful information" about "sources of income" and "items of expenditure, particularly with respect to advertising and marketing expenditure". What is required to be provided is sufficiently detailed meaningful information, which is necessarily information that is useful and practical, not merely minimal accounting information.
88 That said, it should be acknowledged that cl 15(1)(b) is not particularly clear or prescriptive as to what is required to give "meaningful information" about a marketing fund's income and expenditure. However, the general intention of the provision is plain enough, namely that the franchisee should be in a position to know what the income and expenses of the fund are for the purpose of making some meaningful assessment of whether that use is appropriate. The references to "sufficient detail" and "meaningful information" must be understood with that purpose in mind.
89 To be more prescriptive might have reduced the capacity for franchisors to tailor the information provided to a wide range of different circumstances, given the diverse range of economic activities in which franchise arrangements exist. To accommodate those different circumstances, cl 15(1)(b) has a protean quality. What is sufficient detail to give "meaningful information" on a fund's income and expenditure will vary from case to case. Similarly, what may be a sufficient level of detail for certain items or categories of expenditure may be insufficient for others, bearing in mind also that cl 15(1)(b)(ii) necessarily requires a focus "particularly with respect to advertising and marketing expenditure". As a general proposition, 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 to facilitate an informed assessment by the franchisees concerned. There may be cases in which more detail is needed for a lesser expenditure in order to understand why it is appropriate. In each case, however, the adequacy of the statement must be considered and assessed as a whole.
90 The parties made reference to extrinsic material that was said to aid in construction of cl 15(1)(b). Such material, however, must also be approached with caution to the extent that Parliament may have made "aspirational" statements of its intentions that are not reflected in the terms of the Franchising Code. As emphasised by Spigelman CJ in R v JS [2007] NSWCCA 272; 230 FLR 276 at [142], the task of the courts is to determine what Parliament meant by the words it used; it is not to determine what Parliament intended to say.
91 Here, the extrinsic materials do not go further than confirming that the purpose of the provision is to provide accountability and transparency in the use - and potential misuse, or even inappropriate or ineffectual use - of marketing funds. For instance:
(1) it is recommended in the Review of the Franchising Code of Conduct (30 April 2013), by the author, Mr Wein, that the franchising code of conduct be amended based on the principles that:
(a) a franchisor should separately account for marketing and advertising costs; and
(b) the marketing and advertising fund should only be used for expenses which are clearly disclosed to franchisees; and
(2) it is stated in The Future of Franchising, a publication by the Australian Government in April 2014, that the government would "introduce greater transparency for the way in which marketing funds are used and accounted for [including] requiring additional disclosure on the types of expenses marketing funds are being used for".
92 Turning to the present case, it should be noted that, putting to one side questions of the level of detail required by cl 15(1)(b), there is nothing inherently deficient about the structure of the profit and loss statements prepared by Ultra Tune. Although the structure will always be generally relevant to the question of whether information is presented in a meaningful way, the issue here is with content and the provision of information that makes sense to an ordinary reader. Franchisees are not to be taken, just because they are running a business, as having accounting expertise or the like. It is they, not their accountants, who must be placed in a position to understand how marketing funds are being deployed and to form a view as to whether the expenditure is appropriate. It is the ordinary franchisee who must be armed with information that has the necessary qualitative character.
93 Ultra Tune notes in written submissions that the term "annual financial statement" at cl 15(1)(a) is not defined in the Franchising Code or the CCA, but is well known to accountants, auditors and businesses generally, comprising a profit and loss statement and balance sheet. Ultra Tune further submits that if additional information was required as contended by the ACCC, no profit and loss statement or balance sheet would comply with the requirement, and it would "turn into something that no longer was an annual financial statement as … understood by accountants, auditors and businesses." This argument cannot be accepted, as it places undue emphasis on the form of what the statement would take, according to what is submitted to be an industry-accepted standard, above the express substantive requirements of cl 15(1)(b) as to what is required by way of sufficiency of detail.
94 For a number of the minor items, such as "Accounting Fees" and "Bank Charges", there may not be any great issue with how the items have been described. In this case, this is mainly because there is some degree of granularity in the description of the items, and it is doubtful that further detail would bring any great explanatory force to the statement. Moreover, they may well be relatively fixed expenses with little room for reduction or change and therefore real doubt as to whether or not they were, for example, per cl 31(3)(a)(ii) "legitimate marketing or advertising expenses".
95 I do not have enough evidence or other information to accept the suggestion by the ACCC that Ultra Tune's marketing statements were deficient to the extent that they did not explain how the minor items relate to marketing. Indeed, cl 15(1) appears to contemplate that not all of the expenditure of the fund may be on marketing per se, given that it requires a particular focus on items that do. Moreover, it may be inferred that there would or could be accounting fees and bank charges associated with running a marketing fund.
96 The line item for customer support is more cryptic, and might well also be inadequate. However, it is not necessary to decide that in this case because it is sufficient in present circumstances to focus on the central issue of how the lion's share of expenditure was described. In other cases, and indeed in future for Ultra Tune, such a sparse description might warrant closer attention.
97 The substantial deficiency of Ultra Tune's marketing fund statements lies in how the preponderance of the funds' expenditure has been itemised. As described above, the most significant expense is identified simply as "Promotion & Advertising - Television". Ultra Tune submitted that the line item descriptions made it plain that the "vast bulk of the money spent … was on television advertising". The problem with describing that expense in such bare and general terms is that, notwithstanding that there might be some granularity in the description of a large number of minor expenses, the statements provide no meaningful information about how most of the fund has in fact been used. It certainly does not provide sufficient detail so as to give meaningful information about advertising and marketing expenditure as expressly required by cl 15(1)(b)(ii).
98 Put another way, where it is indicated that approximately 80% of a fund has been applied to something as non-specific as "Promotion & Advertising - Television", the statement does little more than suggest, in a circular fashion, that Ultra Tune spent the majority of the marketing fund on marketing. This is plainly inadequate for the purposes of cl 15(1)(b)(ii), and certainly would not assist in ascertaining whether the money was expended on "legitimate marketing or advertising expenses". In these circumstances, a franchisee would have very limited information to inform its understanding of the item. To whom have the fees been paid? What services were obtained, and when? Almost any other questions cannot even be posed, let alone answered, yet it is plain enough that the intent of cl 15(1)(b) is that franchisees be placed in a position whereby they can assess and question how the money they, along with all other contributing franchisees, have provided, has been spent. The information provided is not just lacking the quality of providing "meaningful information"; it has the active quality of providing largely meaningless information except as to raw quantum, begging the question as to what the money was spent on, and how and when. None of the franchisees could have made any useful assessment as to the appropriateness of this item of expenditure based on the financial statement provided by Ultra Tune.
99 In submissions, Ultra Tune notes that franchisees receive "InTune", an in-house newsletter, which includes references to the franchise's advertising and marketing. Ultra Tune also notes, in opening written submissions, that franchisees would be aware of how the marketing fund was spent by virtue of the television advertising being national and on the internet. Although the terms "sufficient detail" and "meaningful information" are subjective, and franchisees may otherwise be aware of specific advertising campaigns, it is clear from the text of cl 15(1)(b) that sufficient detail must be included in the financial statement itself, without recourse being had to other materials, perhaps aided by what might appear in an auditor's report.
100 Ultra Tune also submits that the nature of the adverse findings sought by the ACCC meant that the quality of evidence required to arrive at reasonable satisfaction that the civil standard of proof has been established was that dictated by the reasoning of Dixon J in Briginshaw v Briginshaw (1938) 60 CLR 336 at 360-2, now reflected in s 140(2) of the Evidence Act 1995 (Cth). However, that submission does not seem to engage with the live issue here as to the objective requirements attaching to the document that Ultra Tune was required to create, maintain and furnish to franchisees, with the documents that were in fact so produced being in evidence. To the extent that serious allegations require a reasonable quality of evidence, rather than "inexact proofs, indefinite testimony, or indirect inferences", Ultra Tune has not identified any evidentiary shortcoming.
101 I reject Ultra Tune's submissions referred to above, and more generally. They simply do not grapple with the requirement imposed by cl 15(1)(b) when read with cl 31(3). It follows that I do not accept that Ultra Tune's financial statements for the 2014-15 and 2015-16 financial years came even close to meeting the requirements of cl 15(1)(b). I therefore find that those contraventions have been easily established.
102 Ultra Tune's suggestion that if an adverse finding was made, "the fact that this is the first case on this provision and that its approach has been one that in terms of the provisions, is one that was open to it, are matters relevant to the amount of any pecuniary penalty" must be rejected for several reasons. First and foremost, I do not accept that Ultra Tune's approach was reasonably open to it. Further, Ultra Tune failed to change its practices and approach with the introduction of the Franchising Code on 1 January 2015, despite being a large national company with a large scale franchise business. Sophisticated legal advice was not required to understand that its stance was untenable.
103 In all the circumstances, this was a serious shortcoming and, especially for a large franchisor spending such a large sum of money in a marketing fund, a serious contravention. It was a deficiency for which Ultra Tune provided no real explanation beyond a denial of the manifest inadequacy of what was provided. That stubborn approach calls for a significant deterrent penalty, to encourage future and ongoing compliance by Ultra Tune, as well as franchisors more generally who might otherwise be tempted to skimp on the information provided to their franchisees. To do otherwise would be to countenance ignoring the clear policy objectives of the Franchising Code by making this a hollow requirement, able to be treated in as cavalier a way as Ultra Tune has done.
104 A franchisor may be well advised to err on the side of candour, rather than secrecy, or take the risk of expensive adverse consequences and significant reputational harm. Candour is wise in any event, because it inevitably helps to build trust with franchisees, which in turn is likely to facilitate advancing their mutual interests. The use to which a marketing fund is put can and should easily be the subject of meaningful disclosure to franchisees so that they can properly assess how the money they have been required to contribute has been spent.