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As a franchisor, you must remain up to date with the Franchising Code of Conduct (Code) to stay on top of your obligations. Further amendments to the Code come into effect on 15 April 2022. Primarily, these changes significantly increase penalties that a franchisor may face for contravening specific provisions in the Code. This article summarises the new changes. 

Increased Penalties

You may now incur an increased civil penalty if you contravene certain provisions of the Code. This penalty will be the greater of:

  1. $10,000,000;
  2. three times the value of the benefit the company has attained due to a breach of a provision; or
  3. if the court cannot determine the value of that benefit, 10% of the annual turnover of the relevant body corporate during the preceding 12 months. 

Importantly, this increased penalty will be at least $10,000,000, expressed as the greater of the above three scenarios.

$10,000,000 Penalty

You may incur this significantly increased penalty if you contravene the following provisions:

Clause 17(1) 

A franchisor must provide franchisees with financial details, including changes in statements, declarations or financial statements or audit reports under Item 21 of the Disclosure Document.

Clause 17 (2)

A franchisor must notify a franchisee within fourteen days of becoming aware of certain changes to the franchise system. Clause 17 (3) of the Code lists the matters a franchisor must disclose.

Clause 33

A franchisor must not engage in conduct that would restrict or impair franchisees’ freedom to form an association or associate with other franchisees for a lawful purpose. 

Clause 46A (1), (2) and (3)

Only applies to New Vehicle Dealership Agreements.

Clause 46B

Only applies to New Vehicle Dealership Agreements.

600 Penalty Units

In addition, the penalty has been increased to 600 penalty units ($133,200) if franchisors contravene the following sections of the Code:

Clause 

Relevant Provision

6(4)

(New) A Franchise Agreement cannot limit or exclude good faith obligations.

6(5)

(New) A Franchise Agreement or another document cannot limit or exclude good faith obligations.

11(1)

The franchisor must provide an information statement to a prospective franchisee.

15(4)

The fund administrator must provide contributors with a copy of the annual marketing fund financial statement and audit report of the marketing fund within 30 days. 

22

(Amended) Prohibition on requiring franchisees to pay the franchisor’s costs of settling a dispute.

25(2)

A franchisor must not unreasonably withhold consent to a transfer of a franchise agreement. 

25 (6)

A franchisor must not unreasonably revoke consent to a transfer of a franchise agreement. 

27(4)

A franchisor must not terminate a franchise agreement because of a breach if the breach has been remedied.

29(2)

A franchisor must not terminate for particular grounds unless it has given seven days written notice of the termination, including its grounds.

30 (1)

Obligation not to require a franchisee to incur significant capital expenditure during the franchise agreement term. 

As a franchisor, it is crucial that you comply with the Code or you risk the significantly increased penalties associated with contravening these provisions. The increased penalties will apply to any infringements that occur on or after 15 April 2022. 

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Information Statement After Expression of Interest

Franchisors must now provide prospective franchisees with the Information Statement:

  1. as soon as possible, and not later than seven days after the prospective franchisee formally applies or expresses an interest in acquiring a franchised business; and
  2. before the franchisor provides the franchisee with any disclosure documents as prescribed by the Code.

In light of the new provision, it is clear that franchisors need to provide an Information Statement to prospective franchisees as soon as possible. Therefore, as a franchisor, you should ensure you correctly implement the above processes for providing the Information Statement. For instance, this includes keeping sufficient records about the provision of the Information Statement. From a practical perspective, you can provide this document when obtaining a non-disclosure agreement.

You can also provide the prospective franchisee with an application or other documentation and keep a paper trail showing the provision. For example, you can send it by email or require a receipt or written acknowledgement. 

Good Faith Obligations

Under the changes, Franchise Agreements cannot contain provisions that attempt to limit or exclude the obligation of good faith, including by reference to another document. Essentially, any documents incorporated into your Franchise Agreement also cannot limit or exclude, or attempt to limit or exclude, this obligation.

As a franchisor, you should ensure that you carefully review both your Franchise Agreement and any manuals or similar documents that may be incorporated into your Franchise Agreement by reference to ensure compliance with the changes.

Key Takeaways

The new penalties would certainly be financially disastrous for most franchisors. With significant increases to penalty units across the Code, as a franchisor, you must engage a lawyer to review both your Franchise Agreement and Disclosure Document and assist you in implementing systems to promote compliance with the Code. As the previous significant changes to the Code were only implemented 10 months ago, you should also engage a lawyer to ensure compliance with the major changes to the Code made in the previous year, especially in light of the increased penalties for failure to comply. Further, franchisors should review their onboarding process to ensure prospective franchisees are given the Information Statement following the latest updates to the Code.

If you need help with the amendments to the Code, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions

What is the Franchising Code of Conduct?

The Franchising Code of Conduct is a mandatory industry code that regulates the franchising sector and sets out particular requirements and standards. 

What is the Franchise Agreement?

The franchise agreement is a legally binding contract between a franchisee and a franchisor. It formalises the relationship and creates legal obligations on both parties.

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