A turn in the road for breaches of the Code higher penalties for franchisors

What you need to know

• A new penalty regime has been introduced for breaches of the Franchising Code (the Code) occurring on or after 15 April 2022.
• The new regime includes a significant increase to the maximum penalties for existing penalty provisions as well as the introduction of new civil penalty provisions.
• The changes are designed to deter misconduct in the franchising sector and incentivise compliance with the Code.

What you need to do

• All franchisors should review their frameworks and policy to ensure compliance with the Code.

Rationale for new penalty regime

In March 2019, the Parliamentary Joint Committee on Corporations and Financial Services released the 'Fairness in Franchising' report. The report found that existing penalties under the Code were insufficient to deter breaches by large businesses. Instead, profitable franchisors could simply incorporate potential penalties into their costs of doing business. Accordingly, the Committee recommended increasing penalties in the Code to reflect the severity of offences, size of the franchisor and penalties under the Competition and Consumer Act 2010 (Cth).

As a result of these determinations, updated penalties have now been introduced into the Code. The new regime aims to deter misconduct and incentivise compliance with the Code, thereby promoting greater fairness in the franchising sector.

Increased maximum penalties

$10 million maximum penalty

Maximum penalties for several Code provisions have dramatically increased from 300 penalty units ($66,600) to $10 million. These apply to, amongst other things, a franchisors' obligation to disclose materially relevant information, a franchisees' freedom of association and certain requirements for new vehicle dealership agreements. Such provisions are considered core obligations under the Code, breach of which may damage confidence in the franchising sector and justify the imposition of strong penalties.

Doubled maximum penalties

Penalties have been doubled for a range of existing penalty provisions including the obligation to act in good faith, a franchisors' disclosure, notification and record-keeping obligations and circumstances surrounding termination of a franchise agreement. Maximum penalties for breach of these requirements have increased from 300 penalty units ($66,600) to 600 penalty units ($133,200).

New civil penalty provisions

To further strengthen compliance with the Code, new civil penalty provisions have been introduced to a range of existing obligations. These civil penalties increase franchisors' transparency obligations in their dealings with franchisees across the course of a franchisee/franchisor relationship, commencing with when a franchise agreement is entered into and all the way through to how that agreement is terminated.

Next steps

The updated Code imposes significant new penalties on franchisors who fail to act in accordance with the Code. It is important that all franchisors take care in their dealings with franchisees to ensure compliance with any applicable obligations. Given the recent changes, it is a very important time to review existing arrangements with franchisees so as to avoid potential breaches of the Code as substantial penalties will now apply to a range of breaches.

Authors: Nina Fitzgerald, Partner and Vivien Lin, Graduate.