Time to review your franchise agreements 3 min read
In April this year, highly anticipated increases to the financial penalties for contravening the Franchising Code (the Code) came into effect. As a result of these changes, it's essential that franchisors review their franchise agreements to ensure they remain compliant with the code.
- From 15 April 2022, contraventions by a body corporate of certain provisions of the Franchising Code now attract the new 'Super Penalties', being the greatest of:
- if the court can determine the value of the benefit that the body corporate (and any body corporate related to the body corporate) has obtained directly or indirectly, and that is reasonably attributable to the contravention—three times the value of that benefit;
- if the court cannot determine the value of that benefit—10% of the annual turnover of the body corporate during the period of 12 months ending at the end of the month in which the contravention occurred.
- All previous civil penalties have been doubled from 300 to 600 penalty units – meaning fines of up to $133,200 per contravention of the Code.
- A single act can lead to multiple contraventions of the Code, such as in a multi-franchise system, resulting in penalties in multiples of these amounts.
Franchising and legal compliance teams.
As flagged in our previous Insight, for years now the Federal Government has been focussing on ensuring the 300 penalty unit fine for contravening the Code is not viewed as a 'cost of business' by Australian franchisors – and it may have found its answer.
The new 'Super Penalties' set out above apply to contraventions of the following provisions of the Code:
- obligation to disclose certain materially relevant facts (subclauses 17(1) and (2));
- prohibition on restricting franchisees from forming associations (clause 33); and
- obligations in clauses 46A and 46B that apply to new vehicle dealership agreements only concerning compensation for early termination, requirements to buy back stock etc, and opportunity to make a return on investment.
The amendments to the Code have also introduced civil penalties for provisions that were previously not subject to civil penalties. The following obligations are now subject to a civil penalty of 600 penalty units (currently $133,200):
- franchisors must not enter into a franchise agreement that limits the obligation to act in good faith (subclauses 6(4) and (5));
- franchisors must provide the information statement to a prospective franchisee as soon as reasonably possible and before the prospective franchisee receives the franchise agreement, disclosure document, key facts sheet or the Code (subclause 11(1));
- marketing fund administrators must provide a copy of the fund statement within 30 days of preparing it (subclause 15(4));
- franchisors must not require the franchisee to pay for the costs relating to settling a dispute under the agreement (clause 22);
- franchisors must not unreasonably withhold or revoke consent to a transfer of the franchise agreement (subclauses 25(2) and (6));
- franchisors must not terminate an agreement if the franchisee has remedied its breach (subclause 27(4));
- franchisors must not terminate on particular grounds unless seven days' written notice is provided to the franchisee (subclause 29(2)); and
- franchisors must not require a franchisee to undertake significant capital expenditure (subclause 30(1)).
- Undertake a thorough review of your current franchise agreements to ensure compliance with the clauses mentioned above.
- Contact Nadia Diaz for assistance with ensuring your franchising documentation complies with the Code.