WHAT YOU NEED TO KNOW: Tougher penalties announced for breaches of the Franchising Code

Misuse of marketing funds by Retail Food Group.

Tougher penalties announced for breaches of the Franchising Code.

 

Franchisor’s beware, comply or cough up. Tougher penalties have been announced for breaches of the Franchising Code.

Minister for Employment, Workforce, Skills, Small and Family Business, Stuart Robert, has announced increased penalties for breaches of the Franchising Code of Conduct that will come into effect on the 15th of April 2022.

Announced last week, the changes build on a series of reforms that aim to improve fairness and conduct in the franchising sector.

Breaches for a select group of provisions now attract particularly harsh maximum penalties. For corporate bodies, this means potentially being stung to the tune of:
• $10 million,
• Three times the benefit gained, or
• 10% of annual turnover in the preceding 12 months, where the courts cannot determine the value of the benefit.

Breaches by a non-corporate body are subject to a new penalty of $500,000.

What provisions do harshest of penalties apply to?

These penalties apply to breaches of the Code, including:
– Clause 17(1)- A failure by a franchisor to give a franchisee a statement or declaration of the type referred to in item 21 of Annexure 1 as soon as reasonably practicable, but in any event before the prospective franchisee enters into a franchise agreement with the franchisor.
– Clause 17(2)- circumstances where the franchisor does not give its franchisees the required notice of no more than 14 days after becoming aware of certain events taking place including:

o Changes in majority ownership or control,
o Proceedings or judgement against the franchisor, its directors, or associates,
o Proceedings against the franchisor, a franchisor director, or an associate of the franchisor by at least 10% or 10 of the franchisees,
o Any judgement that is entered against the franchisor or an associate that is not discharged,
o The franchisor becoming a chapter 5 body corporate,
o A change in the intellectual property or ownership or control of the intellectual property.
– Clause 46A relating to New Vehicle dealership agreements, determination of compensation for early termination and or limiting the franchisees right to compensation.

What penalties apply to other provisions?

Penalties for 48 other clauses have been doubled to 600 penalty points ($133,200, up from $66,000). In addition to some of the current clauses in the Code, there are a number of new clauses that will now be the subject of these increased penalties. These clauses include:

Clauses Breach
6(1) A failure to act in good faith.
6(4) A franchise agreement cannot include a provision that limits or excludes or purports to limit or exclude the obligation to act in good faith.
6(5) A franchise agreement or another document cannot include a provision that limits or excludes or purports to limit or exclude the obligation to act in good faith.
8(1) A failure by a franchisor to create a disclosure document that complies with the Code.
8(6) A failure by a franchisor to update its disclosure document within 4 months after the end of its financial year.
8(8) A failure by a franchisor to update its disclosure document so that it reflects the position of the franchise as at the end of the financial year before the financial year in which the request is made by a franchisee.
9(1) A failure by a franchisor to give certain documents to a prospective franchisee.
9(2) A failure by a franchisor to give the required documents to a franchisee at least 14 days prior to any renewal or extension of the term or scope of the franchise agreement.
9(2A) A failure by a franchisor to give the required documents to a transferee at least 14 days prior to the franchisor consenting to the transfer.
9A(2) A failure by a franchisor to update its key facts sheet within 4 months after the end of its financial year.
9A(4) A failure by a franchisor to update its key facts sheet so that it reflects the position of the franchise as at the end of the financial year before the financial year in which the request is made by a franchisee.
11(1) A failure by a franchisor to give the prescribed Information Statement as soon as practicable, and no later than 7 days after a prospective franchisee formally applies or expresses an interest in acquiring a franchised business and before disclosure documents and franchise agreements are provided to the prospective franchisee.
13(1) A failure by a franchisor to provide the lease or agreement to lease and details of any financial benefit or incentive the franchisor is entitled to receive.
13(2) A failure by a franchisor to provide the lease/agreement to lease and details of any financial/incentive within 1 month after the lease or agreement to lease is signed.
14(1) A failure by a franchisor to provide to a franchisee, certain other agreements that a franchisee may be required to sign.
15(2) A failure by a marketing fund administrator to prepare and audit (if required) an annual financial statement of a marketing fund’s receipts and expenses within 4 months after the end of its financial year.
15(4) A failure by a marketing fund administrator to give to franchisees a copy of the statement and audited report (if required) showing the marketing fund’s receipts and expenses within 30 days of receiving it.
18(2) A failure to provide to a franchisee an end of term notice within the requisite timeframe.
19A(1) A franchisor entering into a franchise agreement that has the effect of requiring a franchisee to pay certain of its legal costs.
22 A franchise agreement that contains a provision that requires a franchisee to pay all part of the franchisor’s legal costs
25(2) A franchisor withholding its consent to the transfer of a franchise agreement.
26(3) A franchisor failing to repay all payment made by a franchisee within 14 days of the franchisee cooling off.
27(2) A failure by a franchisor to give a franchisee a compliant breach notice.
27(4) Termination of a franchise agreement in circumstances where a franchisee has remedied the breaches specified in a breach notice.
29(2) A failure by the franchisor to provide a franchisee with the required notice of its intention to terminate a franchise agreement in special circumstances.
30(1) A franchisor requiring a franchisee to undertake significant capital expenditure during the term of the franchise agreement.
31(2) A failure by a fund administrator to maintain a separate bank account for payments to the marketing fund.
31(3) A franchisor failing to make contributions to the marketing fund in respect of units they operate in the same way that franchisees are required to make.
32(3) A franchisor engaging in conduct with the intention of influencing a former franchisee to make or not make a request that their details not be disclosed to a prospective franchisee.
41A(3) A failure by a party to a dispute to attend an ADR process.
43B(8) A failure by a party to a dispute to attend arbitration.

What are the implications for franchises?

The new penalties build on other reforms to the Franchising Code in recent years including a new version of the Code released in late 2020. Changes in 2021 included the establishment of a mediation and franchising adviser within the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), changes to disclosure, increased avenues for dispute resolution, restrictions on restraints of trade and penalties related to breach of payment obligations for marketing funds. Learn more about other recent reforms to the Franchising Code.

Minister Robert has said that these new penalties will, “…provide a strong deterrent against breaches of the Code and prevent non-compliance from being factored into the cost of business, particularly by large multinational franchisors that seek to take advantage of small business franchisees.”

Whilst maximum penalties are not often handed down, the high figures should certainly act as a deterrent given the potential to irreparably harm the financial viability of a franchise. There is no room for error and certainly not for wilful breaches.

Franchisors should ensure that they are familiar with their obligations under the Code. If you have any concerns or would like more information, please contact Baybridge Lawyers’ Franchising Law team ahead of the penalties coming into force on the 15th of April.

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