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:

  1. $10,000,000;
  2. three times the value of the benefit received by the franchisor; or
  3. 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.

Contact a commercial lawyer for tailored advice about your franchise agreement and the Franchising Code

If you require assistance in understanding how these new changes may impact any agreements you have entered into, we recommend getting in touch with our Sydney commercial lawyers for a confidential discussion on 02 9262 4003 or by submitting an online enquiry

The content of this article is intended as a general guide to the subject matter. For specific legal advice about your individual circumstances, please contact our experienced lawyers.

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