Franchise

Significant increases to penalties under revised Franchising Code

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.

From 15 April 2022, penalties under the Franchising Code will double or increase to as much as $10 million.

Here are the key 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) (sections 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 (section 33)
  • for new vehicle dealership agreements:
    • the obligation to provide compensation to a franchisee if the agreement is terminated early in prescribed circumstances (section 46A)
    • the obligation to provide the franchisee with a reasonable opportunity to make a return under the agreement (section 46B).

 

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; and
  • 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 (section 27(4));
  • franchisor should not terminate a franchise agreement without providing seven days’ notice and reason for the termination; and
  • 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

On 1 April 2022, the Franchising Code was amended to establish a framework for the Franchise Disclosure Register (Register) and require franchisors operating in Australia to create a ‘profile’ on the Register (to register see here) and publish particular disclosure information (which includes core information about the franchisor’s business). The franchisor may also choose to upload the franchisor’s disclosure document, the key fact statement and template franchise agreement.

Franchisors will have until 14 November 2022 to create a profile and publish the relevant disclosure information, and must then continue to ensure that the latest disclosure information is available on the Register. The Register is due to be available to the public from 15 November 2022.

Franchisors risk civil penalties of 600 penalty units (currently $133,200) per contravention of the requirements to:

  • disclose the required information on the Register; and
  • keep that information up to date.

 

The Register Regulations also:

  • require that personal information and information related to a particular franchisee or a particular site being occupied by a franchisee must be redacted from the franchisor’s documentation; and
  • permit the redaction of information that is of a commercial nature and is commercially sensitive (this potentially permits the redaction of a wider range of material beyond the information contained in the disclosure document related to rebates, which was the original scope of information that was previously able to be redacted in an exposure draft of the Register Regulations).
Recommended actions for franchisors

Franchisors should consider the following actions as a matter of priority:

  • be mindful of the significantly increased penalties applicable to the contravention of many provisions of the Franchising Code from 15 April 2022;
  • review standard franchising templates to ensure compliance with the Code; and
  • by 14 November 2022, create a profile and upload the required information to the Register.  Franchisors that upload their documents to the Register will also need to consider the information in their documents that must be redacted and the commercially sensitive information that they may choose to redact.

 

For more information and expert advice, ask to speak to Special Counsel Damian McGrath at Ezra Legal on (08) 8231 6100 or email dmcgrath@ezralegal.com.au

For information on the range of commercial legal services that we provide at Ezra Legal, head to:

Julian Roffe

Practice Manager

Ezra Legal

Categories: Blog, Commercial

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