The Franchising Code of Conduct (Code) aims to be a straightforward piece of legislation that outlines the obligations of both the franchisor and franchisee. As with many contractual arrangements, a party to the agreement may fall short of fulfilling their duties according to the terms of the contract or the applicable legislation or common law. This is not foreign in the franchising landscape.
The franchisor, however, should be wary that non-compliance with the Code can lead to enforcement action, not only from a franchisee’s claims but also from the Australian Competition and Consumer Commission (ACCC). This article will outline the common actions the ACCC may take if either the franchisee or franchisor contravenes the Code.
If you are reviewing the Code, as every franchisor should, the document is filled with references to civil penalties. Civil penalties refer to the ACCC’s ability to require payment of a monetary amount for any breach of the Code. All of the civil penalties in the Code are 300 penalty units. This is equivalent to $51,000. If you are reviewing your obligations according to the Code, be mindful of any reference to civil penalties, especially with regards to:
- Clause 6(1): This clause refers to your obligation to act in good faith. Although good faith is not precisely defined in the Code, there are many common law examples outside of the franchising context that sheds light on how “good faith” may be interpreted by a court. This may include, as an example, being honest with the franchisee or informing the franchisee of any changes to the franchise arrangement.
- Clause 15(1): This clause refers to the set up for any marketing or other cooperative fund and the requirement to prepare annual financial statements and the requirement for the statement to be audited by an independent auditor. Although a marketing or other cooperative fund is not necessary at the commencement of a franchise, it is important that if one is set up, that the franchisors are aware of their obligations when it comes to reporting their financial position.
- Clause 28(3): This clause outlines the contractual termination provisions. If you plan to terminate a franchise agreement, you will need to provide written notice, and it goes without saying, you will also need to comply with any required dispute resolution procedures.
The above clauses are only a snapshot of the franchisor’s obligations. Many other provisions of the Code attach the possibility of being charged with civil penalties.
Going to Court
Civil penalties can only be enforced by the ACCC if they go to court. The ACCC will litigate a matter in court if it decides this is the best option for resolving the dispute. These include matters that may have a deterrent effect on other franchisors or matters that may impact the public, for example, when it comes to payment of minimum wages to employees.
Infringement notices are an informal way for the ACCC to enforce the provisions of the Code. Similarly to the civil penalties, an infringement notice can only be issued for the breach of a penalty provision. Again, it’s important to not only be aware of your obligations under the Code, but particularly which clauses carry with it the possibility of civil penalties.
Unlike the enforcement of civil penalties, infringement notices per breach is fixed at $9,000 for corporate entities and $1,800 for individuals. Infringement notices are usually issued when the facts of the matter are not in dispute and non-compliance seems to be one that is an isolated occurrence. If payment of the infringement notice is not made, the ACCC may take the matter a step further and bring it to court.
The ACCC have the power to enforce the Code as the external body administering compliance. As a franchisor it is important to be aware of these enforcement possibilities before entering into a franchise – your franchisee will not be the only one monitoring your obligations. Questions? Let our franchise team know on 1300 544 755.