Higher penalties for breaches of the Franchising Code

Articles Written by Sar Katdare (Partner), Angelica Sorn (Associate), Liz Tang (Associate)
A target.

What you need to know

On 15 April 2022, compliance with the Franchising Code of Conduct (Code) will become even more critical for franchisors.

This is because from that date:

  • the maximum penalties for most contraventions of the Code will be doubled;
  • penalties for other contraventions will be significantly increased to match maximum penalties for cartel conduct and breaches of Australian Consumer Law; and
  • new penalties will be introduced for breaches of other provisions.

The ACCC has also expressly stated that compliance with the Code will be one of its enforcement priorities for 2022.

Summary of changes

The maximum penalty for breaches of the following obligations under the Code will be: (for companies) the greater of $10,000,000, three times the value of the benefit or 10% of relevant annual turnover for companies; and (for individuals) $500,000:

 

Obligation

Description

1

 

Disclosure

 

Obligation of franchisors to disclose materially relevant facts to prospective franchisees before entering into a franchise agreement or within a reasonable time after the franchisor becomes aware of them.

2

Freedom to associate

Obligation of franchisors to not restrict or impair a franchisee or prospective franchisee from forming an association or associate with other franchisees for a lawful purpose.

3

 

New vehicle dealership agreements

 

Requirement for new vehicle dealership agreements to provide compensation to franchisees for early termination under certain circumstances.

Requirement for franchisors to not enter into a new vehicle dealership agreement unless the agreement provides the franchisee with a reasonable opportunity to make a return on investment during the period of the agreement.

The maximum penalty for breaches of the following obligations under the Code will be doubled – 300 penalty units to 600 penalty units ($133,200):

 

Obligation

Description

4

Good faith

Obligations on parties to a franchising agreement to act in good faith.

5

Disclosure before entering agreement

Obligation of the franchisor to provide disclosure documentation before entering a franchise agreement.

6

Disclosure when entering agreement

Disclosure obligations of franchisors when entering into a franchise agreement.

7

Disclosure document on request

Obligation of franchisor to provide a copy of the disclosure document upon request by the franchisee.

8

Notification and record-keeping

Notification and record-keeping obligations of the franchisor for end of term arrangements.

9

Termination

Obligations in relation to termination of a franchise agreement.

10

Notice before termination

Obligation of franchisor to provide reasonable written notice before terminating a franchise agreement, where franchisee has not breached the agreement.

11

Marketing fund and non-disclosure of former franchisee’s details

Obligations surrounding franchise agreements requiring the franchisee to pay money into a marketing fund.

Obligations surrounding the non-disclosure of a former franchisee’s details.

12

ADR and arbitration

Obligations of each party to a dispute to attend the ADR process and, if agreed to escalate to arbitration, to attend any arbitration.

13

Notification and end-of-term

Obligations of the franchisor relating to notification at the end of term of a franchise agreement.

New maximum penalties of 600 penalty units ($133,200) for breaches of the following obligations under the Code will be introduced:

 

Obligation

Description

14

Limit good faith obligation

Obligation on franchisors to not enter into a franchise agreement that limits the obligation to act in good faith, including by applying, adopting or incorporating the words of another document.

15

Information statement

Obligation of franchisors to provide a copy of the Information Statement to a prospective franchisee within a reasonable time, before formal disclosure of more detailed documents.

16

Financial statement for marketing funds

The fund administrator must provide the franchisee a copy of the financial statement for marketing funds and other cooperative funds administered by or for the franchisor or master franchisor within 30 days.

17

Cost of settling disputes

Obligation of franchisors to not enter into franchise agreements that require the franchisee to pay for the costs of settling any disputes.

18

Transfer

Obligation of franchisors to not unreasonably withhold or revoke consent to the transfer of a franchise Agreement.

19

No termination if breach remedied

Obligation of franchisors to not terminate a franchise agreement where the franchisee has remedied their breach of the agreement.

20

Notice for termination

Obligation of franchisors to not terminate franchise agreements without providing 7 days’ notice and the reason for the termination.

21

Significant capital expenditure

A franchisee does not have to undertake significant capital expenditure in relation to their franchise business.

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).

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