Consequences for Non-Compliance: Franchising Code of Conduct

In Short

• The ACCC can issue fines and take legal action against franchisors for non-compliance.
• Penalties include fines of up to $63,000 or infringement notices for $10,500.
• Recent cases, like Domino’s and Ultra Tune, show the ACCC’s commitment to enforcing the Code.

Tips for Businesses

Ensure compliance with the Franchising Code by maintaining accurate disclosure documents, acting in good faith, and meeting financial reporting requirements. Regularly review your processes to avoid costly penalties and protect your brand’s reputation. Consulting with a legal expert can help mitigate risks.

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Table of Contents

• Penalties Under the Franchising Code
• Financial Penalties Against Domino’s
• ACCC Initiating Court Proceedings
• Key Takeaways
• Frequently Asked Questions

The Australian Competition and Consumer Commission (ACCC) has powers to enforce the Franchising Code of Conduct (the Code). In particular, the ACCC can investigate franchisors, issue infringement notices and seek court-imposed financial penalties.  In this article, we’ll take a look at the penalties set out in the Code and at some examples of the ACCC enforcing the Code.

Penalties Under the Franchising Code

In 2015, the Code was updated to include civil penalties. Civil penalties are financial penalties that can be imposed on a party who breaches the Code. The current civil penalty is $63,000. Under the Code, the ACCC can issue a penalty for failing to:

• act in good faith;
• create a Code-compliant disclosure document;
• provide lease information where the franchisee occupies a premises without a lease; and
• attend mediation under the Code’s complaint handling procedure.

The ACCC’s website has a full list of provisions that carry civil penalties.

The ACCC must take action in court to impose civil penalties. However, this can be expensive and time-consuming. Accordingly, the ACCC will not always do this and has several other compliance and enforcement powers. In particular, the ACCC can issue infringement notices if it reasonably believes a business is in breach of the Code. The infringement notice sets out the alleged breach and requires payment of $10,500 against a corporation or $2,100 against an individual or unincorporated entity.

Financial Penalties Against Domino’s

The ACCC took action against Domino’s Pizza Enterprises Ltd (Domino’s). Consequently, Domino’s became the first franchisor to pay penalties for non-compliance with the Code. Under the Code, franchisors have an obligation to provide a financial statement and auditor’s report to franchisees within four months after the end of the financial year if the franchisee is required to contribute to a marketing or other cooperative fund. The statement and report aim to give franchisees sufficient detail of how the franchisor has spent their contributions on marketing and advertising. The ACCC believed that Domino’s failed to provide its franchisees with these items within four months.

Domino’s has since disclosed that it provided the 2015–16 statement and reported in late February 2017, confirming that they did not meet the obligation. In their media release, the ACCC stated that their priority is ensuring small businesses receive the protection afforded them under industry codes. This is the first example of the ACC imposing a financial penalty against a franchisor for non-compliance with the Code. The ACCC’s actions prove that they intend to enforce compliance with the Code.

ACCC Initiating Court Proceedings

The ACCC also confirmed that it commenced court proceedings against Ultra Tune Australia Pty Ltd (Ultra Tune), a motor repair franchisor. The ACCC claimed that the franchisor failed to act in good faith with a prospective franchisee. The Code imposes a general obligation to act in good faith in all dealings between parties entering franchise agreements The ACCC also claimed that Ultra Tune failed to provide:

• key documents required by the Code to a prospective franchisee;
• necessary marketing fund financial statement and auditor report to its franchisees for three consecutive years.

The ACCC stated that it would seek court orders including civil penalties and a refund of the prospective franchisee’s payment.

The ACCC also started court proceedings against another franchisor, Geowash Australia Pty Ltd (Geowash). In addition to failing to act in good faith as required by the Franchising Code, the ACCC also claims that Geowash made false and misleading statements to prospective franchisees about the:

• amount of revenue and profits that to expect when operating a Geowash franchise; and
• existence of commercial relationships with various large motor vehicle corporations.

Importantly, the ACCC also alleges that Geowash’s director and National Franchising Manager knew about the conduct. Consequently, the ACCC seeks orders not only against Geowash but also against these individuals. If the ACCC is successful, the individuals could be banned from managing a corporation for five years.

Key Takeaways

The ACCC has several options to stop franchisors acting illegally, including seeking financial penalties in court.  The success of the ACCC in several matters demonstrates their priority of using the Code to protect small business franchisees.

As a franchisor, if you need advice on your obligations under the Code, call LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions