In brief

Franchisors will need to be increasingly mindful of meeting their obligations under the Australian Franchising Code as a result of new and increased penalties which commence on 16 April 2022.

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Contents

1. Background
2. New penalty offences
3. Higher penalty offences
4. Higher penalties for new motor vehicle dealership offences
5. Franchise Register to come

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Background

The increase had been expected following changes made last year to the Competition and Consumer Act 2010 (Cth.) which permitted mandatory industry codes such as the Franchising Code to be amended to:

1. double existing maximum penalties from 300 “penalty units” (currently AUD 66,600) to 600 penalty units (currently AUD 133,200) per breach; and
2. specifically in the case of the Franchising Code, introduce a penalty equal to the highest penalty in Australian competition and consumer law, being, for a corporation, the greater of:
   • AUD 10 million;
   • three times the total value of the benefits obtained that are reasonably attributable to the contravention where benefits cannot be fully determined; and
   • if the court cannot determine the value of the benefit, 10% of the annual turnover of the company in the preceding 12 months,

and for any individuals, a maximum penalty of AUD 500,000 per breach.

However, it was unclear how these would be incorporated into the Code.

There is some good news for most franchisors in that the AUD 10 million plus maximum penalty will only apply to two of the obligations under the Code. All other existing penalties have doubled to 600 penalty units per offence and additional obligations now attract penalties.

The doubled penalties are significant, are per offence and for some offences may apply per franchisee, so may be multiplied many times over. However, they are maximums and will be treated as such. Courts have discretion to apply an appropriate penalty up to the maximum amount, must consider the relevant facts of any given case, and impose a penalty that is proportionate to the conduct. The intent is that the maximum amount would only be applied in the most egregious instances of non compliance.

New penalty offences

Obligations with a penalty for the first time are:

1. the prohibition on excluding or limiting the obligation of good faith in a franchise agreement;
2. the obligation to provide a Code information statement;
3. the obligation to provide franchisees with a copy of a marketing fund audit statement within 30 days of receiving it;
4. not requiring a franchisee to reimburse a franchisor’s costs of settling dispute;
5. not unreasonably withholding consent to transfer;
6. not terminating for breach if the breach is remedied;
7. failing to give seven days’ notice before termination, even on “immediate” termination grounds;
8. not requiring a franchisee to undertake significant capital expenditure during the term of a franchise agreement, with limited exceptions.

Higher penalty offences

Two obligations applying to all franchisors will attract the new AUD 10 million plus penalty:

1. the obligation that a franchisor not engage in conduct which would restrict or impair franchisees from associating with each other for a lawful purpose;
2. the continuing obligation in the Franchising Code to disclose certain listed matters to a franchisee or prospective franchisee, even after they have been provided with a disclosure document or have signed a franchise agreement.

Neither of these obligations has been the focus of the ACCC’s compliance efforts to date.

The continuing disclosure obligation could be forgotten if a franchisor is not actively granting new franchises. Franchisors should review their compliance systems and processes to ensure that this obligation is front of mind, in light of the more than one hundred fold increase in the maximum penalty for its breach.

As a reminder, this continuing disclosure obligation includes the following:

1. if a disclosure document is given to a prospective franchisee, and the franchisor’s financial reports, solvency statement or auditor’s statement supporting the solvency statement which were included in the disclosure document are updated before the franchisee signs, the franchisor must provide them with a copy as soon as reasonably practicable, but in any event, before they enter into the franchise agreement; and
2. if a disclosure document does not mention the following, the franchisor must tell both current and prospective franchisees in writing, within a reasonable time (but not more than 14 days) after the franchisor becomes aware of it, about:
   • a change in majority ownership or control of the franchisor, an associate of the franchisor or the franchise system;
   • proceedings by a regulator or a judgment in criminal or civil proceedings or an award in an arbitration against the franchisor, a franchisor director, an associate of the franchisor or a director of an associate of the franchisor in Australia alleging a breach of a franchise agreement, certain breaches of Australian law, unconscionable conduct, misconduct or an offence of dishonesty;          
   • civil proceedings in Australia against the franchisor, a franchisor director, an associate of the franchisor or a director of an associate the franchisor, by at least 10%, or 10, of the franchisees in Australia of the franchisor (whichever is the lower);
   • any judgment that is entered against the franchisor or an associate of the franchisor in Australia, and is not discharged within 28 days, over a prescribed minimum amount;
   • any judgment that is entered against the franchisor or an associate of the franchisor in Australia or elsewhere convicting them of a serious offence or relating to their bankruptcy or insolvency;
   • the franchisor or an associate of the franchisor being wound up, under administration, entering into a compromise or arrangement with its creditors or having a receiver or manager being appointed in respect of its property;
   • a change in the intellectual property, or ownership or control of the intellectual property, that is material to the franchise system;
   • the existence and content of any formal undertaking given by the franchisor or an associate of the franchisor to the ACCC.

Higher penalties for new motor vehicle dealership offences

The higher AUD 10 million plus maximum penalty will apply to the compensation and return on investment obligations which were introduced into the Code in 2021 for new motor vehicle franchisors. Importantly, these obligations and the new penalties do not apply to all “motor vehicle” dealerships, which term includes many motorised vehicles, such as motorcycles, tractors, farm and construction machinery and motor boats. They only apply to dealerships that predominantly deal in new passenger vehicles and/or new light goods vehicles.

The obligations to which the new higher penalties apply are that a new motor vehicle dealership agreement must provide for:

1. the franchisee to be compensated if the franchise agreement is terminated before it was due to expire because the franchisor withdraws from the market, rationalises its networks or changes its distribution models;
2. buy back or compensation for new road vehicles, spare parts and special tools if the above occurs or if the franchise agreement is not renewed; and
3. a reasonable opportunity for the franchisee to make a return, during the franchise agreement term, on any investment the franchisor required as part of entering into or under the franchise agreement.

Franchise Register to come

These changes do not yet include the introduction of an Australian Franchise Register, which is Government policy and was announced last year. Additional changes to the Code to introduce such a Register are expected shortly.