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In March 2021, the Federal Government announced several
amendments to the Franchising Code of Conduct (Franchising Code)
following an enquiry into the operation and effectiveness of the
Franchising Code. Further changes have since come into effect on 15
April 2022, which will see increased penalties being imposed on
franchisors for breaching certain provisions of the Franchising
Code. In this article, we have summarised these new changes.
Maximum penalties for franchisor breaches
Franchisors who are found to be in breach of the Franchising
Code will now be exposed to greater penalties. These penalties
apply to an array of clauses of the Franchising Code.
In most cases, the maximum penalty will be up to $133,200.
However, for breach of certain provisions, the maximum penalty for
corporations will be the greater of:
- $10,000,000;
- three times the value of the benefit received by the
franchisor; or - 10% of the annual turnover of the franchisor in the 12 months
preceding the breach, if a court cannot determine the value of that
benefit obtained from the breach.
Provisions attracting the maximum penalty
There are seven provisions of the Franchising Code that, if
breached, will attract the maximum penalty applicable to
corporations. These provisions include:
-
Clauses 17 (1) and (2) (Disclosure of materially
relevant facts) – relating to the obligation of
franchisors to disclose financial statements, relevant documents,
and any other material facts to a franchisee before an agreement is
entered into within a specific timeframe. -
Clause 33 (Association of franchisees or prospective
franchisees) – relating to
the obligation of franchisors not to restrict a franchisee
(including, prospective franchisee) from forming associations with
other franchisees for a lawful purpose. -
Clause 46A (1) – (3) (Franchise agreement must provide
for compensation for early termination) and 46B (Franchise
agreement must provide reasonable opportunity for return on
franchisee’s investment) – relating to new
vehicle dealership agreements.
In addition, if the following sections of the Franchising Code
are contravened, franchisors will incur a penalty of 600 units
(equating to $133,200):
- Clauses 6 (4) and (5) (Obligation to act in good
faith) – a franchise agreement or other documents
cannot limit or exclude good faith obligations. - Clause 11 (1) (Information
Statement) – the franchisor must provide an
information statement to a prospective franchisee no later than 7
days after the prospective franchisee formally applies or expresses
an interest. - Clause 15 (4) (Financial
statement for marketing funds) – a financial
statement for marketing funds must be provided to the franchisee
within 30 days. - Clause 22 (Costs of settling
disputes) – a franchisor
must not require a franchisee to pay their costs of settling a
dispute under the franchise agreement. - Clause 25 (2) and (6) (Franchisor’s consent to
transfer) – a franchisor must not unreasonably
revoke or withhold consent to a transfer of a franchise
agreement. - Clause 27 (4) (Termination -
breach by franchisee) – a franchisor must not
terminate a franchise agreement where the franchisee has remedied
their breach, after allowing the franchisee reasonable time (no
more than 30 days) to remedy the breach. - Clause 29 (2) (Notice of
termination by franchisor on particular
grounds) – a franchisor cannot terminate a
franchise agreement without providing 7 days written notice to the
franchisee explaining their reasons for the proposed
termination. - Clause 30 (1) (Significant
capital expenditure not to be required) – a
franchisor has an obligation not to require a franchisee to incur a
significant capital expense.
For information on changes made to the code in July
2021, refer to our article: Changes to the Franchising Code of Conduct you
need to be aware of.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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