The primary judge's reasons
10 The primary judge recorded that Ultra Tune is a franchisor for motor vehicle engine repair and maintenance services provided by a national network of approximately 200 franchises operating in New South Wales (divided into metropolitan and country), Queensland, Victoria and Western Australia: [1].
11 In the 2014 - 2015 financial year, Ultra Tune had 185 franchisees. In 2015-2016 it had 200 franchisees: [15].
12 Although no penalty could be imposed for contraventions of the Franchising Code before 1 January 2015 (referred to as the Pre-2015 Code) the primary judge said at [68] that these contraventions were relevant because they meant that the later contraventions could not be said to be out of character. In the primary judge's words at [68]:
These earlier contraventions therefore additionally operate as a prism through which to view the later contraventions. However, care must be taken to ensure that the penalty is proportionate to the instant contravention and that no element of the pecuniary penalty imposed for later contraventions is reflective of any sanction for these earlier contraventions: see Construction, Forestry, Maritime, Mining and Energy Union v Australian Building and Construction Commissioner (The Non-Indemnification Personal Payment Case) [2018] FCAFC 97 at [22].
13 The primary judge noted at [69] that Ultra Tune admitted that contrary to cl 17(1)(a) of the Pre-2015 Code, it failed to prepare annual financial statements within four months of the end of the 2011-12 and 2012-13 financial years as required. For the 2011-12 financial year, the statement was completed on 30 November 2012, instead of by 31 October 2012. For the 2012-13 financial year the statement was completed on 28 November 2013, instead of by 31 October 2013: [69]. Ultra Tune also admitted that contrary to cl 17(1)(c) of the Pre-2015 Code, it did not provide annual financial statements and auditor's reports to any franchisee as required to be done within 30 days of preparation, no such statements having been provided for the 2011-12 financial year, the 2012-13 financial year or the 2013-14 financial year: [70]. Ultra Tune admitted that, contrary to cl 6(1) of the Pre-2015 Code, it failed to create a disclosure document within four months after the end of the 2014-15 financial year, that document having been completed on 5 December 2014 instead of by 31 October 2014: [71].
14 For conduct after 1 January 2015 (which enabled the imposition of civil penalties) the primary judge recorded that:
(1) Ultra Tune admitted that, contrary to cl 15(1)(a) of the Franchising Code, it failed to prepare marketing fund statements within four months after the end of the last financial year for the 2014-15 financial year (that document having been completed on 24 December 2015 instead of by 31 October 2015): [74].
(2) Ultra Tune admitted that, contrary to cl 15(1)(d) of the Franchising Code, it did not provide to franchisees the annual financial reports and auditor's reports for the marketing funds for the 2014-15 financial year within 30 days of their preparation. Those reports had been completed on 24 December 2015, so were required to be provided to each franchisee who was required to contribute to the marketing funds (which was all franchisees) by 24 January 2016. In fact, however, as the primary judge said at [75]:
1. "the annual financial statement and auditor's report for the Queensland region was provided to two Queensland franchisees on 28 January 2016;"
2. "the annual financial statement and auditor's report were provided to a single NSW franchisee on 29 January 2016, following a specific request by that franchisee; and"
3. "the annual financial statement and auditor's report for each region was provided to the other 182 franchisees for the 2014-15 financial year on 11 August 2016, over seven months after they were created rather than within the necessary 30 days, and therefore over six months late."
(3) Ultra Tune admitted that, contrary to cl 8(6) of the Franchising Code, it did not update its disclosure documents for the 2015-16 financial year within four months after the end of the 2014-15 financial year, being 31 October 2015. Those documents were not completed until 26 February 2016, so were almost four months late, taking almost twice as long as required: [76].
(4) Ultra Tune admitted that, contrary to cl 16(1)(b), it did not provide a disclosure document to a franchisee in Morayfield within 14 days of a request made on 16 December 2015, that document having not been provided until 23 March 2016, over three months after the request was made.
15 The appeal against penalty relates to the contraventions in (1) to (3) above, there being no appeal against penalty in respect of the contravention in (4).
16 The primary judge said this at [73] by way of general observation about the admitted contraventions:
On any view, the admitted disclosure contraventions of the Franchising Code described below were substantial, and in the case of the more lengthy delays described were of a relatively high level of objective seriousness when due regard is had to the reason why these requirements exist in the first place and the extent of the non-compliance. The later the provision of such information, the less use it is and the closer it comes to not providing it at all. Such requirements are now able to be deterred by the sanction of substantial pecuniary penalties, taking into account the number of franchisees affected in relation to information that was not provided to them as required.
17 The primary judge then dealt with the disputed disclosure contraventions. His Honour recorded at [78] that:
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.
18 As his Honour put it at [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.
19 At [81] his Honour identified that the question of construction that arises is as to the proper meaning of the expression "sufficient detail" in cl 15(1)(b). This issue, his Honour said, had not been the subject of any previous authority (and no such authority has been identified in this appeal): [81]
20 In construing the obligation the primary judge correctly identified at [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.
21 The primary judge continued noting that:
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.
22 The primary judge concluded that Ultra Tune's financial statements did not satisfy the requirement of cl 15(1)(b) of the Franchising Code. The primary judge said:
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 Spigelmann 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…
…
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.
…
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.
23 The primary judge rejected Ultra Tune's submission that a newsletter containing more information about expenditure was relevant, saying at [99]:
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.
24 His Honour also rejected Ultra Tune's submission that any adverse finding had to meet the civil standard of proof 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). His Honour said that Ultra Tune had not identified any evidentiary shortcoming: [100].
25 The primary judge said this at [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.
26 The primary judge rejected Ultra Tune's submission that it was relevant that this was the first case about the provision and its position was reasonably open to it. In the primary judge's words at [102]:
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.
27 According to the primary judge at [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.
28 At [104] his Honour said:
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.
29 In considering the overall issue of penalties for the disclosure contraventions the primary judge noted that under s 76(1) of the Competition and Consumer Act 2010 (Cth) (the CCA) the Court is to have regard to all relevant matters including:
(1) the nature and extent of the act or omission and of any loss or damage suffered as a result of the act or omission;
(2) the circumstances in which the act or omission took place; and
(3) whether the person has previously been found by the Court in proceedings under Pt VI or Pt XIB of the CCA, to have engaged in any similar conduct.
30 The primary judge also noted the various factors which have been said to be relevant including, for example, in Competition and Consumer Commission v Singtel Optus Pty Ltd (No 4) [2011] FCA 761; 282 ALR 246 at [11]: [303]. He referred also to the purpose of a civil penalty as protective of the public interest in promoting compliance, Australian Building and Construction Commissioner v Construction, Forestry, Mining and Energy Union [2017] FCAFC 113; 254 FCR 68 at [98]: [304].
31 The primary judge identified as a key issue in dispute whether each act or omission by Ultra Tune in relation to its disclosure obligations "should be characterised as being a contravention in relation to each franchisee to which the obligation in some way related, or whether some form of aggregation is required, either as a matter of law, or as a matter of approach having regard to practicality or fairness": [306]. He correctly observed at [307] that:
The number of contraventions and the maximum penalty for each is important because it sets the overall maximum penalty that is applicable. The Court is required to form a view as to how serious each contravention is, how serious the overall effect of all the contraventions is, and what the individual and overall penalty should be, including by way of adjustment so that the aggregate sanction is proportionate to the conduct. This ensures that the overall penalty imposed is just, as a matter of what is known in the criminal law as "totality". It should not be a crude mathematical exercise, but necessarily there is a mathematical relationship between these related components.
32 His Honour concluded at [312] that there is a single obligation, capable of constituting only a single contravention for a given financial year:
(1) of maintaining each disclosure document for each of Ultra Tune's four State-based regions, and thus up to four such contraventions;
(2) of preparing the single marketing fund statement for each of the marketing funds for the five Ultra Tune marketing regions, and thus up to five such contraventions; and
(3) of ensuring that the single marketing fund statement for each of the marketing funds for the five Ultra Tune marketing regions contains "sufficient detail", and thus up to five such contraventions.
33 His Honour considered that a "failure to prepare a document, to maintain a document, or to have enough detail in a document does not amount to a greater number of contraventions merely because it is required subsequently to be given to, say, 100 franchisees rather than 10 franchisees": [313]. However, the number of franchisees, he considered, would be relevant to penalty. In contrast, the obligation in cl 15(1)(d) to give the franchisee the statement involves a separate contravention for each franchisee: [316].
34 His Honour's approach resulted in the following at [318]:
Number and type of disclosure obligation contraventions Maximum penalty Competing positions
4 Failure to maintain each of the four separate disclosure documents by updating each within four months of the end of the 2014-15 financial year: cl 8(6) $216,000 Ultra Tune admitted the conduct, but disputed the number of contraventions. The ACCC seeks a penalty of $200,000 (four contraventions x $50,000)
5 Failure to prepare each of the five financial statements for the five separate marketing funds within four months of the end of the 2014-15 financial year: cl 15(1)(a) $270,000 Ultra Tune admitted the conduct, but disputed the number of contraventions. The ACCC seeks a penalty of $250,000 (five contraventions x $50,000)
10 Failure to ensure that each of the five financial statements for the five separate marketing funds included "sufficient detail" for each of two financial years, 2014-15 and 2015-16: cl 15(1)(b) $540,000 Ultra Tune denied that the conduct had taken place and in any event disputed the number of alleged contraventions. The ACCC seeks a penalty of $350,000 (ten contraventions x $35,000)
185 (financial statement) Failure to provide to franchisees one of the five different marketing fund financial statements that related to their region within 30 days after each having been prepared for the 2014-15 financial year, to be grouped with the simultaneous and parallel alleged contravention of the failure to provide to franchisees an auditor's report for each of those marketing fund statements: cl 15(1)(d). $9.99 million (financial statement) Ultra Tune admitted the conduct, but disputed the number of contraventions. The ACCC seeks a penalty of $62,500 (185 contraventions treated as five courses of conduct x $12,500) - an average of just over $337 per contravention, although that sum will be less for regions with a larger number of franchisees and more for regions with a smaller number of franchisees
185 (auditor's report) $9.99 million (auditor's report)
(maximum arrived at by multiplying the number of contraventions (185) by the maximum per contravention ($54,000)
1 Failure to provide a disclosure statement when requested by a franchisee on 16 December 2015 (and required to be provided within 14 days of the request):cl 16(1) $54,000 Ultra Tune admitted this contravention. The ACCC seeks a penalty of $30,000.
Total sought by ACCC: $892,500