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Increased penalties for Franchising Code breaches

The franchising sector will be subject to new civil penalty provisions and increased maximum penalties from 15 April as recent amendments to the Franchising Code of Conduct (the code) come into effect.1

The code’s new penalty regime follows a recent federal parliamentary report, ‘Fairness in Franchising’, which recommended new and increased civil pecuniary penalties after it was observed that the current penalties were “manifestly inadequate and fail to provide any meaningful deterrent”.2

The code has subsequently been amended with the purpose of deterring misconduct and improving compliance, as well as furthering the objective of the Competition and Consumer Act 2010 (the Act) to enhance the welfare of Australians by promoting competition and fair trading.3

Increased maximum penalties – $10m+

The code will now impose significantly higher civil penalties for contravening the following civil penalty provisions:4

  • Clause 17(1)-(2): Disclosure of materially relevant facts
  • Clause 33: Association of franchisees or prospective franchisees
  • Clause 46A(1)-(3): Franchise agreement must provide for compensation for early termination
  • Clause 46B: Franchise agreement must provide reasonable opportunity for return on franchisee’s investment.

Where a body corporate contravenes a civil penalty provision, the body corporate will incur a civil penalty that is the greatest of the following:5

  • $10 million
  • Three times the value of the benefit obtained from the contravention
  • 10% of the annual turnover during the period of 12 months ending at the end of the month in which the contravention occurred.

For a contravention by a person who is not a body corporate, the amount of the civil penalty will be $500,000.6

These provisions currently attract a penalty of 300 penalty units (that is, $66,600).7

Increased maximum penalties – 600 penalty units

The power to prescribe pecuniary penalties under the code is governed by section 51AE of the Act.8 The power was amended last year to increase the maximum pecuniary penalty from 300 penalty units to 600 penalty units.9

Following that amendment, a number of civil penalty provisions in the code now prescribe a penalty of 600 penalty units. The table below details the civil penalty provisions in the code that now impose 600 penalty units.

ClauseDetails
6(1), (4)-(5)Obligation to act in good faith
8(1), (6), (8)Franchisor must maintain a disclosure document
9(1), (2)-(2A)Franchisor to give documents to a franchisee or prospective franchisee
9A(2), (4)Key facts sheet
11(1), (3)Franchisor to give information statement to prospective franchisee.
13(1)-(2), (2A)-(4B)Disclosure obligations – Copy of lease etc.
14(1)Disclosure obligations – Copy of other agreements
15(2), (4)Financial statements for marketing funds and other cooperative funds administered by or for franchisor or master franchisor
16(1)Franchisee may request copy of disclosure document
18(2)-(3)Notification obligations – End of term arrangements
19A(1)Franchisor’s legal costs relating to franchise agreement
22Costs of settling disputes
25(2), (6)Franchisor’s consent to transfer
26(3)Termination – cooling off after entering into new franchise agreement
26A(4), (6)Termination – cooling off after transferring franchise agreement
27(2), (4)Termination – breach by franchisee
28(3)Termination – no breach by franchisee
29(2)Notice of termination by franchisor on particular grounds
30(1)Significant capital expenditure not to be required
31(2)-(4)Payments to and from marketing funds
32(3)Disclosure of former franchisee details
41A(3)ADR process
43B(8)Arbitration procedure
47(2)-(5)Notification obligation – franchisor

Amended civil penalty provisions

A number of provisions in the code have been amended to give effect to the intention of the amendments and the recommendations in the parliamentary report.

The following provisions in the code have been amended:10

  • Clauses 6(4) and (5) have been amended to prohibit franchisors from entering into a franchise agreement that limits the obligation to act in good faith.
  • Clauses 11(1) and (3) have been amended to clarify that a franchisor must provide a copy of the information statement to a prospective franchisee within a reasonable time.
  • Clause 22 has been amended to specify that a franchisor must not enter into a franchise agreement that requires the franchisee to pay for the costs of settling any disputes.
  • Clause 25(6) has been amended to clarify the obligation for the franchisor to not unreasonably revoke consent to transfer a franchise agreement.
  • Clause 27(4) has been amended to clarify the franchisor’s obligation to not terminate a franchise agreement where the franchisee has remedied their breach of the agreement.

As stated above, these amendments take effect on 15 April 2022, meaning any contraventions of the code on or after that date will attract the significantly higher penalties detailed.

Yale Hudson-Flux is a graduate intern at Queensland Law Society.

Footnotes
1 Competition and Consumer (Industry Codes – Franchising) Amendment (Penalties and Other Matters) Regulations 2022 (Cth).
2 Parliamentary Joint Committee on Corporations and Financial Services, ‘Fairness in Franchising’ (March 2019) p224.
3 Explanatory Statement, Competition and Consumer (Industry Codes – Franchising) Amendment (Penalties and Other Matters) Regulations 2022 (Cth) p1.
4 Competition and Consumer (Industry Codes – Franchising) Amendment (Penalties and Other Matters) Regulations 2022 (Cth) sch 1, item 1.
5 Ibid sch.1, item 1.
6 Ibid sch.1, items 25-26, 46, 49-52.
7 Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (Cth) cls 17(1)-(2), 33, 46A(1)-(3), 46B.
8 Competition and Consumer Act 2010 (Cth) s51AE.
9 Treasury Laws Amendment (2021 Measures No.6) Act 2021 (Cth) sch.2.
10 Explanatory Statement, Competition and Consumer (Industry Codes – Franchising) Amendment (Penalties and Other Matters) Regulations 2022 (Cth) pp3-8.

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