Penalties for breaching the Franchising Code explained

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The Government passed legislation increasing penalties for breaches of the Code

From 15 April 2022, penalties will change in 3 ways: 

  1. New $133,200 penalties are introduced for some breaches; 
  2. Breaches of 3 important obligations will have a penalty of up to $10m*; and 
  3. Other existing penalties will increase from $66,600 (300 penalty units) to $133,200 (600 penalty units). 
Why did they make the changes? 

To increase active compliance with the Code. Some large franchisors were not deterred by the lower penalties – they would incorporate the risk of a penalty into their cost of doing business. 

What penalties have changed? 
Obligation on franchisor  Clause in Code 
New $133,200 penalties 
1. To give franchisees a copy of the annual marketing fund statement and audit within 30 days of preparing and receiving it.  15(4) 
2.   To act in good faith. Not to enter into franchise agreements which limit this.  6(1), (4)-(5) 
3.   To give a prospective franchisee the information statement within 7 days of their application or expression of interest. This must be given before any franchise documents. 

We suggest reviewing your recruitment process to ensure this is given in time. 

4. Not to enter into franchise agreements that require franchisees to pay the franchisor’s costs for settling a dispute.  22 
5. Not to unreasonably withhold or revoke consent to a transfer.  25(2), (6) 
6.   Not to terminate a franchise agreement: 

  • because of a breach, where the breach has been remedied; or 
  • under the special circumstances provision of the Code, unless the franchisor has given the required 7 days’ notice. 
27(4), 28(2) 
7.  Not to require franchisees to undertake significant capital expenditure.  30 
Increases to $10m *
8. To disclose any new financial statements/reports to franchisees: 

  • as soon as possible; and 
  • before they sign a new franchise agreement. 
9. To disclose any materially relevant fact** in writing to franchisees within 14 days of it happening (if it is not already in the disclosure document).  17(2) 
10.  Not to restrict franchisees from forming an association.  33 
Increases from $66,600 (300 units) to $133,200 (600 units)  
11.  All other obligations in the Code that already have penalties. 

Note: We have not included penalties which only relates to new vehicle dealerships. 

* The $10m Penalty – Explained 

For companies, penalties will be the higher of: 

  • $10 million; 
  • 3 times the amount they financially benefited from the breach (if it can be determined); and  
  • 10% of annual turnover (if the above can’t be determined). 
  • For individuals, this will be $500,000. 

**What is a materially relevant fact about the franchisor? 
  • a change in ownership; 
  • any court judgement. This applies to certain proceedings, so please seek advice if relevant; 
  • if more than 10% of franchisees bring proceedings against them; 
  • a change in intellectual property; or 
  • going into liquidation or being wound up.  

What do you need to do? 
  • Review the penalty changes below and understand the increased risk to your business. 
  • Review your processes for recruitment, annual disclosure document updates and marketing funds to ensure you are compliant. 
  • Let us know if you need any help! 

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