On 15 April 2022, new civil penalty provisions and increased maximum penalties for contraventions to the Franchising Code of Conduct (the Code) came into effect.

The change in the Code’s policy regime followed the federal parliamentary report ‘Fairness in Franchising’, which provided recommendations to implement new and increased financial penalties to provide an adequate and meaningful deterrent to contraventions of the Code.

In accordance with this recommendations, significantly higher civil penalties for contraventions of various civil penalty provisions were instituted in a bid to deter misconduct and improve compliance with the Code, as well as enhance the objective of the Competition and Consumer Act 2010 (the Act) to enhance the welfare of Australian citizens by promoting competition and fair trade.

The following civil penalty provisions are now subject to increased penalty:

  • 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.

For a person who is not a body corporate, the amount of the civil penalty for a contravention of one of the above is now $500,000.00.

Where a body corporate is found in contravention of one of the above civil penalty provisions, the body corporate will now incur a civil penalty that is the greatest of:

  • $10 million; or
  • three times the value of the benefit obtained from the contravention (if the court can determine the value of the benefit that is directly or indirectly, and reasonably attributable to the contravention); or
  • 10% of the annual turnover of the entity for the 12 month period ending at the end of the month in which the contravention occurred.

The increase in civil penalty also comes following amendment of section 51AE of the Act, which had the effect of doubling the maximum pecuniary penalty available from 300 penalty units to 600 penalty units. The following civil penalty provisions now impose a penalty of 600 penalty units should they be contravened:

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

Each contravention of one of the above provisions now incurs a penalty of 600 penalty units ($133,200). It is important to understand that a single act may amount to multiple contraventions of the Code, such as in a multi-franchise system, which can easily result in penalties in multiples of this amount.

In addition to the changes in pecuniary penalty available for contravention of the above clauses, amendments were made to the following provisions of the Code that were not previously subject to civil penalties, however are now subject to the penalty of 600 penalty units:

  • Franchisors are now prohibited from entering into a franchise agreement that limits obligations to act in good faith under clauses 6(4) & (5);
  • A franchisor must now provide a copy of the information statement to a prospective franchisee as soon as reasonably possible and before the prospective franchisee receives the franchise agreement, disclosure documents, key fact sheet or the Code per clause 11(1);
  • Marketing fund administrators must provide a copy of the fund statement within 30 days of the statement’s preparation per clause 15(4);
  • A franchisor must not enter into a franchise agreement that requires the franchisee to pay for the cost of settling disputes between the parties under clause 22;
  • A franchisor must not unreasonably withhold or revoke consent to transfer a franchise agreement under clause 25(2) & (6);
  • A franchisor has an obligation to not terminate a franchise agreement where the franchisee has remedied their breach of the agreement per clause 27(4);
  • Franchisor’s may not terminate the franchise contract on particular grounds unless 7 days’ written notice is given to the franchisee per clause 29(2); and
  • Franchisors must not require a franchisee to undertake significant capital expenditure per clause 30(1).

Due to these new developments, you should ensure a thorough review of your current franchise agreement is carried out to ensure your agreement complies with the above-mentioned clauses.

If you are unsure of whether you are meeting your obligations under the Code, please don’t hesitate to contact our experienced Newcastle intellectual property lawyers at Butlers Business Lawyers on (02) 4929 7002 or fill out an enquiry form on our website.