According to a 2019 parliamentary report, the Franchising Code of Conduct (Code) failed to adequately deter non-compliance by franchisors as some large and profitable businesses have been able to absorb penalties as a cost of doing business.
In response, penalties under the Code have now increased significantly. From 15 April 2022, new penalties were introduced for specific provisions in the Code, and many existing penalties have doubled or increased.
As a franchisor (and a franchisee), it’s important that you remain up to date with the Code to stay on top of your rights and obligations.
The new penalties
The maximum liability for breaches of 7 particular obligations in the Code have increased from $66,600 to:
- for companies, $10 million,3 times the commercial benefit achieved from the non-compliant behaviour, or 10% of the franchisor’s gross turnover (whichever is the highest amount); and
- for individuals (such as company directors), $500,000.
These obligations include:
- disclosure of materially relevant facts. This is the obligation of a franchisor to notify their franchise network within 14 days of certain things occurring, some of which include a sale of the franchise system, change of their directors/shareholders, change of ownership of their intellectual property, ACCC proceedings against the franchisor, or proceedings made against the franchisor by 10% or 10 franchisees (whichever is lower); and
- the ban on franchisors restricting or impairing franchisees from forming an association.
The other penalty provisions
The maximum financial penalties for breaches of all other penalty-attracting obligations havedoubled from 300 penalty units ($66,600) to 600 penalty units (currently $133,200). It must be noted that not all breaches of the Code attract a penalty – the Code sets out which provisions attract penalties, and these include the obligation of the parties to a Franchise Agreement to act in good faith.
The list of obligations under the Code attracting penalties has been expanded. Some of the new additions include:
- the obligation of a franchisor to provide statements of their marketing fund;
- the prohibition on a franchisor unreasonably withholding consent to the transfer of a Franchise Agreement (i.e.sale of a franchisee’s business); and
- the prohibition on a franchisor terminating a Franchise Agreement because of an unremedied breach.
It is important to note that a separate penalty applies for every single breach. In other words, if a franchisor’s breach affects 10 different franchisees, they will face 10 sets of the same penalty.
The amendments to the Code have also changed the obligations of a franchisor to provide a copy of the prescribed Information Statement to a prospective franchisee. Instead of providing this within a reasonable time of that person expressing an interest in the franchise, it must now be provided within 7 days, and before formal Disclosure Documents are issued by the franchisor.
Franchise Disclosure Register
A separate amendment to the Code passed on 1 April 2022 was the requirement for franchisors to create a profile on the newly established Franchise Disclosure Register by 14 November 2022. The Register will be operated by the government and will become publicly accessible (for free) on the MyGovID website from 15 November 2022.
The Code sets out the bare minimum 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.
It will be optional for a franchisor to upload other information about the franchise system, such as copies of their Disclosure Document, Key Facts Sheet and Franchise Agreement. In doing so, franchisors will be entitled to redact commercially sensitive information. There are also strict requirements to redact personal information of franchisees.
Franchisors must keep their information on the Register up to date. It must be updated at least once a year by the fourteenth day of the fifth month following the end of the financial year (within two weeks after the franchisor updates their Disclosure Document each year).
What should franchising parties do now?
Now is a good time for franchisors to review operational practices together with their Disclosure Documents and standard-form Franchise Agreement templates to ensure continued compliance with the Code.
All franchisors should make their teams aware of the higher penalties and amended provisions. A contravention occurring on or after 15 April 2022 maybe subject to significantly higher penalties. Ongoing disclosure must be a focus and notification of materially relevant facts must occur promptly.
If you require advice on the changes to the Code, reviewing your templates or getting your profile set up on the Franchise Disclosure Register, please contact a member of our Franchising Team.
At Salerno Law, we are experienced in acting for both franchisors and franchisees in all aspects of franchising law.
By Luke McKavanagh and Michael Millin
Luke has specialised in franchising law since his admission into practice and has acted for a diverse range of franchisors and franchisees of a variety of franchise systems. He is also an active member of the Queensland Law Society Franchising Law Committee where he keeps on the forefront of the latest developments in laws affecting franchising, and contributes towards submissions to government on topical issues facing the franchising industry.