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AUSTRALIAN FRANCHISING CODE CHANGES TO INCLUDE $51,000 PENALTIES

by Jason Gehrke,
last updated 07/04/2014

2 April 2014 - The Federal Government in Australia has detailed changes to that country's franchise legislation, the Franchising Code of Conduct, which are due to come into effect next year. Jason Gehrke provides a helpful summary.

The Federal Small Business Minister, Bruce Bilson, has today announced changes to the Franchising Code of Conduct to come into effect from 1 January 2015. However, public consultation into the proposed changes closes on April 30, leaving franchise sector stakeholders just four weeks (including the Easter Holidays) to respond to the new draft of the Code and its supporting legislation.

In a six-page media statement titled 'The Future of Franchising', the Minister announced that the changes to the Code followed the recommendations of the 2013 Wein Review, and further consultation with the franchise sector.

Key changes to the Code include the introduction of an obligation to act in good faith, financial penalties of up to $51,000 for major breaches, and new powers for the Australian Competition and Consumer Commission (ACCC) to issue infringement notices up to $8,500 without having to seek a court order.

Stiff penalties to apply to 10 broad areas of franchising conduct

Penalties of up to $51,000 based on a penalty units system will apply to 10 broad areas of franchising conduct under the proposed draft Code and reinforced by proposed changes to the Competition and Consumer Act (CCA).

Changes to the CCA will also enable penalties to potentially apply to all mandatory industry codes of conduct, including the Oil Code, the Horticulture Code, and the Unit Pricing Code in addtion to the Franchising Code of Conduct.

The changes to the Competition and Consumer Act create and recognise penalty units for breaches of an industry code. The number of penalty units that apply to a breach are listed in the draft Franchising Code itself.

Breaches worth 300 units accrue a penalty of up to $51,000. The Treasury website which has announced the changes to the Code notes that the ACCC can issue infringment notices of up to $8,500 without seeking a court order.

Based on 300 units equalling a financial penalty of $51,000, this would mean that an infringement notice of $8,500 would be equal to 50 penalty units.

There are 10 broad areas for which breaches of the draft Code will attract a penalty of up to 300 units, and consequently incur a financial penalty of $51,000.

A list of major breaches which attract the highest penalties are summarised in the table below.

General nature of Code breach

Clause ref. in draft Code

Failing to act in good faith

(7(2))

Failing to provide a disclosure document, or maintain it in the form prescribed

9(3), 9(10) and 17(1)

Failing to provide a copy of a lease or other agreements required under the Code

Clauses 14(1-4) incl. & 15(1)

Failing to provide financial statements relating to the franchisor

16(1)

Failing to disclose materially relevant facts

18(1)

Failing to indicate the franchisor’s intention to renew a franchisee within the required timeframe, and failing to provide a disclosure document when providing such notice

19(2) and 19(3)

Failing to repay monies to franchisees who have terminated agreements during the cooling-off period

27(3)

Terminating a franchisee without providing a breach notice, the remedy and a reasonable timeframe, or otherwise terminating a franchisee not in breach unless otherwise permitted by the Code

28(2) and 29(3)

Failing to disclose details of former franchisees, or failing to remove a franchisee from the list of former franchisees when requested

33(2) and 33(3)

Inducing franchisees not to associate, or hindering franchisees’ freedom of association

34

Failing to attend mediation (applies to both parties to a mediation)

42(3)

Table 1: A summary of draft Code breaches that attract maximum penalties.

Four key areas of change

The Government’s changes have been broadly categorised under four major headings:

  1. Reducing red tape;
  2. Improving information available to franchisees;
  3. Strengthening the balance in franchise agreements;
  4. Improving conduct in the sector and the overall effectiveness of the Code.

The government’s statement claims that red tape will be reduced by the elimination of short-form Annexure 2 disclosure, so-called “double-disclosure” for international franchisors operating in Australia; removing the need to summarise agreement provisions in the disclosure document, and other changes to the Code to reduce ambiguity.

Franchisors will be obliged to provide potential franchisees upfront with a risk statement about franchising, to disclose how the proceeds from online sales are deal with, and to be more transparent with marketing funds, including holding funds in a separate bank account, and disclosing types of expenses to allocated to the fund, as well as giving franchisees an option to vote for an annual audit.

Franchisors will also be compelled to contribute equally to marketing and other co-operative funds for any company-owned outlets.

Changes to the balance of power in franchise agreements prevent franchisors from attributing their costs in dispute resolution to franchisees, and require dispute resolution to be conducted in the state where the franchisee is based, not where the franchisor is based.

Additionally, capital expenditure requirements most be disclosed in the franchise agreement, justified to franchisees by a statement outlining the rationale, costs and expected benefits or otherwise agreed by a majority of franchisees in the system.

Restraint of trade provisions have also been targeted, potentially allowing ex-franchisees the freedom to continue operating as independents after the end of their franchise agreement.

In addition to penalties of up to $51,000 for major breaches of the Code, the ACCC will also be able to apply fines of up to $8,500, and also compel franchisors to provide a wider range of documentation in response to its existing audit powers.

A new section of the Franchising Code requires both parties to the agreement to act in good faith toward one another before, during and at the end of franchise agreements.

Good faith is not defined in the Code, however parties are required to act honestly and not arbitrarily, and to cooperate to achieve the purposes of the agreement. If an agreement does not include a clause allowing a franchisee to renew, this does not mean that the franchisor has acted in bad faith.

New format for Code, but hardly shorter

Lawyers and franchisors will need to reread the Franchising Code of Conduct from scratch following changes announced by the government today.

While the new draft embodies most of the existing Code, as well as the government’s changes, it is reformatted and renumbered, meaning a direct line by line comparison between the current and new draft Codes is not as starightforward as with Code changes previously.

The new format of the Code still follows a four-part construction, but creates new subheadings throughout and groups sections of the Code into new categories.

However at 61 pages, the draft of the new Code is only two pages shorter than the current version, even after eliminating the 15 pages previously given to Annexure 2 Disclosure (also known as short-form disclosure), which has now been removed from the Code.

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