As previously foreshadowed, the Government has now amended the Franchising Code of Conduct (Code) to introduce significantly higher penalties and new penalties for specified breaches of the Code. The amendments are contained in the Competition and Consumer (Industry Codes – Franchising) Amendment (Penalties and Other Matters) Regulations 2022 (Amending Regulation). The amendments made will take effect on 15 April 2022.
Please note this Amending Regulation does not deal with the proposed new Franchise Disclosure Register as that will be dealt with separately by the Government. This article gives an overview of the key changes. Our automotive team will also publish a separate article to deal with changes to the Code which are specific to motor vehicle dealers.
Super Penalty – $10M+
On and from 15 April 2022, the Code will include a new ‘super’ penalty for breaches of a small number of important provisions of the Code. These ‘super’ penalties will apply to contraventions that occur on or after 15 April 2022.
The new ‘super’ penalty for a franchisor will be:
- If the franchisor is a body corporate, the greater of:
- $10M;
- if the Court can determine the value of the benefit, whether a direct benefit or indirect benefit, obtained by the franchisor (or a related body corporate of the franchisor) attributable to the contravention – 3 times the value of the contravention; or
- if the Court cannot determine the value of the benefit – 10% of the annual turnover of the franchisor in the prior 12 months from the contravention.
- If the franchisor is not a body corporate – $500,000.
The relevant super penalty provisions include:
- Clause 17 – which deals with the obligation to ensure a franchisor gives ongoing disclosure of financial details (such as those listed in Item 21) and changes in materially relevant facts listed in clause 17(3) of the Code;
- Clause 33 which deals with the obligation not to engage in conduct that restricts or impairs a franchisees ability to form an associate or associate with other franchisees for a lawful purpose; and
- Clauses 46A(1), (2) and (3)and 46B which apply only to New Vehicle Dealership Agreements.
Ongoing disclosure of materially relevant facts
Clause 17 of the Code obliges a franchisor to give ongoing disclosure to a prospective franchisee, franchisee or transferee of materially relevant facts. It has two distinct limbs, one limb deals with financial details and the second limb deals with other changes in materially relevant facts listed in clause 17(3) that are not otherwise contained in the disclosure document. These obligations are not new and have been in place for many years.
The first limb requires a franchisor to give a prospective franchisee any new director solvency declaration, financial statement or audit report that comes into existence after the date the franchisor gave the disclosure document but before the prospective franchisee enters into the franchise agreement. This typically can occur during the 4 month disclosure update period when prospective franchisees may have been given a disclosure document that has financial details relating to the prior financial year and the franchisor subsequently creates a new solvency declaration or obtains new financial statements or an audit report before the franchisee signs the franchise agreement.
The second limb of clause 17, is the requirement that a franchisor update all franchisees (including prospective franchisees and transferees) when certain events occur. A franchisor has a maximum of 14 days to tell all franchisees. The specific events are set out in clause 17(3) and include events relating to a change in majority ownership of the franchisor, a change to ownership of intellectual property, Court judgments and certain Court proceedings, including proceedings commenced by public agencies like the ACCC. Based on past experience, some franchisors don’t properly understand the requirements of clause 17 and have been tardy in notifying franchisees of these important changes.
It is therefore critical that franchisors familiarise themselves with the requirements of clause 17 as failure to comply may now involve a fine of at least $10M.
Association of franchisees or prospective franchisees
Clause 33 will also now be the subject of a super penalty. Clause 33 prevents a franchisor from engaging in conduct which would restrict or impair franchisees from forming an association or associating with each other for a lawful purpose.
Increased Penalty Units and new Super Penalties
The amendments also increase the maximum penalty for contravention of other civil penalty provisions of the Code from 300 penalty units ($66,600) to 600 penalty units ($133,200).
Most of the existing civil penalty provisions have been increased to 600 penalty units. Critically for franchisors, the amendments mean that some existing provisions of the Code (that are not currently civil penalty provisions) will become civil penalty provisions on and after 15 April 2022. In addition certain new provisions will also be subject to a civil penalty. The table below sets out the new provisions of the Code where a penalty will apply if a contravention occurs on or after 15 April 2022.
| Clause | Heading/Issue | New Penalty |
|---|---|---|
| 6(4) | Good Faith - Agreement cannot limit or exclude good faith obligation | ✔ - 600 penalty units |
| 6(5) | Good Faith - Agreement or another document cannot limit or exclude good faith obligations | ✔ - 600 penalty units |
| 11(1) | Obligation to give an information statement | ✔ - 600 penalty units |
| 15(4) | Obligation to give a copy of annual marketing fund financial statement and audit report within 30 days | ✔ - 600 penalty units |
| 17(1) | Obligation to give financial details - changes in statements, declaration or financial statements or audit reports under Item 21 | ✔ - Super penalty |
| 17(2) | Obligation to give disclosure of changes in materially relevant facts (listed in clause 17(3) | ✔ - Super penalty |
| 22 | Prohibition on requiring a franchisee to pay franchisor's costs of settling a dispute | ✔ - 600 penalty units |
| 25(2) | Obligation not to unreasonably withhold consent to a transfer of a franchise agreement | ✔ - 600 penalty units |
| 25(6) | Obligation not to unreasonably revoke consent to a transfer of a franchise agreement | ✔ - 600 penalty units |
| 27(4) | Obligation not to terminate a franchise agreement because of a breach if it is remedied | ✔ - 600 penalty units |
| 29(2) | Obligation not to terminate for particular grounds unless it has given 7 days written notice of the termination and ground for it | ✔ - 600 penalty units |
| 30(1) | Obligation not to require a franchisee to incur a significant capital expense | ✔ - 600 penalty units |
| 33 | Obligation not to engage in conduct that restricts or impairs a franchisees ability to associate | ✔ - Super penalty |
Most of the new provisions and drafting changes to existing provisions of the Code are subtle but there are some important changes to existing obligations which franchisors will need to understand and implement from 15 April 2022.
The most obvious change which will have an immediate and real impact is the timing of when you must provide a copy of the Information Statement to a prospective franchisee. A franchisor must now give the Information Statement to a prospective franchisee not later than seven days after the prospective franchisee formally applies or expresses interest in acquiring a franchised business. In addition it must be given before any of the formal disclosure documentation is provided to the prospective franchisee. All franchisors will need to carefully review their on-boarding process and ensure that this new time frame is met and that there are records to substantiate compliance. Failure to do this may result in a significant penalty, especially if the breach occurs on multiple occasions. Franchise lawyers will also need to ensure their clients have provided the Information Statement before issuing franchise disclosure documentation to new franchisees.
A copy of the new compiled version of the Code with these changes will become available shortly after the provisions commence on 15 April 2022.
We also expect that next week the Government will release an amending regulation to establish and set out the framework of the new Franchise Disclosure Register that will commence to be publicly searchable on 15 November 2022.
Conclusion
All franchisors should make their teams aware of the higher penalties and amended provisions. A contravention occurring on or after 15 April 2022 will be subject to significantly higher penalties for contravention. Ongoing disclosure must be a focus and notification of materially relevant facts must occur promptly.
If you require advice on these changes please contact a member of our Franchising Team.
This article was written by Sean O’Donnell, Partner and Derek Sutherland, Partner.
