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Franchisors beware: Five important changes to penalties and obligations under the Franchising Code

13 April 2022

#Corporate & Commercial Law

Published by:

Jean Lukin, Michael Tong

Franchisors beware: Five important changes to penalties and obligations under the Franchising Code

Penalties under the Franchising Code of Conduct (Franchising Code) are increasing significantly. From 15 April 2022, new penalties will be introduced and many existing penalties will double or increase to as much as $10 million.

The Franchising Code failed to adequately deter non-compliance as some large and profitable businesses have been able to absorb penalties as a cost of doing business, according to a 2019 parliamentary report.

In response to that report, the government introduced an amendment to the Competition and Consumer Act 2010 in 2021, which increased some of the maximum penalties under the Franchising Code. Read our previous discussion here.

The new Competition and Consumer (Industry Codes—Franchising) Amendment (Penalties and Other Matters) Regulations 2022 (Code) is the latest development in a suite of reforms aimed at encouraging better compliance with existing franchising legislation.

In this article, we set out the five most important changes that franchising parties need to know.

1. The maximum liability for breaches of certain obligations increased from $66,600 to $10 million or three times the benefit (for body corporates) and $500,000 (for individuals). 

This applies to the following existing obligations under the Code:

  • the obligation for a franchisor to disclose certain facts before a prospective franchisee enters into a franchise agreement (or within a reasonable timeframe after the franchisor becomes aware of them) – see section 17(1) and (2) of the Code
  • the obligation for a franchisor not to restrict or impair the freedom of franchisees or prospective franchisee’s freedom to form an association or associate with other franchisees or prospective franchisees for a lawful purpose – see section 33 of the Code
  • for new vehicle dealership agreements:
    • the obligation to provide compensation to a franchisee if the agreement is terminated early in prescribed circumstances – section 46A of the Code
    • the obligation to provide the franchisee with a reasonable opportunity to make a return under the agreement – see section 46B of the Code.

Specifically, the maximum penalty for the above obligations is increased for individuals to $500,000, and for body corporates to the greater of:

  • $10,000,000; or
  • three times the value of the benefit, where there is:
    • a benefit obtained by the body corporate (and any related body corporates)
    • that benefit is reasonably attributable to the contravention
    • the value of the benefit is determinable by a court; or
  • if the court cannot determine the value of the benefit to the body corporate, 10 per cent of the annual turnover of the body corporate during the 12 months ending at the end of the month in which the contravention occurred.

2. The maximum financial penalties for breaches of all other pre-existing obligations doubled, from 300 penalty units ($66,600) to 600 penalty units ($133,200).

This includes breaches of the requirement to act in good faith under section 6(1) and the various obligations relating to the disclosure of documents (see sections 13, 14 and 15 of the Code).

3. New obligations

The updated Code also introduces a raft of new obligations, including:

  • franchisors must not enter into a franchise agreement that limits the obligation to act in good faith
  • franchisor to provide a copy of the information statement to a prospective franchisee within a reasonable time, and before formal disclosure of detailed documents
  • franchisor must not enter into a franchise agreement that requires the franchisee to pay the franchisor costs incurred by the franchisor in relation to settling a dispute under the agreement.

4. New penalties

The updated Code also introduces new penalties for the following existing obligations:

  • for a fund administrator to provide the franchisee with a copy of the fund’s financial statement under section 15(4) of the Code
  • franchisor must not unreasonably withhold consent to the transfer of a franchise agreement under section 25(2) of the Code
  • franchisor should not terminate the franchise agreement because of a remedied breach – see section 27(4) of the Code
  • franchisor should not terminate a franchise agreement without providing seven days’ notice and reason for the termination
  • franchisor should not require a franchisee to undertake significant capital expenditure in relation to a franchised business during the term of the franchise agreement.

These new penalties also have a maximum value of 600 penalty units each ($133,200).

5. Franchisors need to create a profile on the Franchise Disclosure Register by 14 November 2022

In a separate tranche of amendments to the Code passed on 1 April 2022, a further obligation was introduced into the Code which requires franchisors to create a profile on the Franchise Disclosure Register by 14 November 2022. The Register will become publicly accessible on the government’s MyGovID website from 15 November 2022.

The Code sets out the information that must be disclosed, including the franchisor’s name, registered address, principal place of business and email address. Failure to disclose the necessary information may result in substantial civil penalties.

What should franchising parties do now? 

Now is a good time to review standard franchising templates to ensure compliance with the Code.

If you need assistance with reviewing these templates or getting your profile set up on the Franchise Disclosure Register, please contact us or send us your enquiry here.

Disclaimer
The information in this article is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.

Published by:

Jean Lukin, Michael Tong

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