New franchising penalties introduced 2022

New franchising penalties introduced 2022

NEW FRANCHISING PENALTIES 

The Competition and Consumer (Industry Codes – Franchising) Amendment (Penalties and Other Matters) Regulations 2022 (Penalty Regulations) was published in March 2022 and amends the Franchising Code by introducing or significantly amending penalties in Franchising Code:

The Penalty Regulations introduce new penalty provisions that will apply to breaches of the Franchising Code that consist of:

  • a failure to disclose materially relevant facts in relation to financial details and other matters such as change of ownership, criminal or civil proceedings or judgment recorded against the franchisor, before a prospective franchisee enters into a franchise agreement or within a reasonable time after the franchisor becomes aware of them;
  • restricting franchisees’ freedom to associate for a lawful purpose; and
  • for vehicle dealerships:
    • failing to compensate franchisees in the event their agreements are terminated early or in some case not renewed; and 
    • failing to provide reasonable opportunity for a franchisee to make a return on their investment.

For body corporate franchisors, the penalty imposed is the greatest of the following:

  • $10,000,000;
  • 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—3 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.

If the franchisor is not a body corporate, the penalty for a contravention is $500,000.

In addition to the maximum civil penalties, all other civil penalty provisions have been doubled to 600 penalty units (currently equal to $133,200.00 for individuals and $666,000.00 for body corporates). Additionally, a number of sections have now been made civil penalty provisions and these include:

  • Entering a franchise agreement that limits or excludes, or purports to limit or exclude the obligation to act in good faith;
  • Failing to provide to a potential franchisee an information statement:
    • within seven days of them formally applying or expressing an interest in acquiring a franchised business; and
    • before the franchisor gives the prospective franchisee a copy of the Code, the franchise agreement and the disclosure document.
  • Entering into an agreement that requires a franchisee to pay the franchisor’s costs in settling a dispute under the agreement;
  • The franchisor unreasonably revoking or withholds their consent to a transfer of a franchise agreement. A Franchisor may withhold their consent in the circumstances listed in section 25(6A) of the Franchising Code;
  • Terminating a franchise agreement where a breach has been remedied;
  • Failing to provide franchisees with a copy of the marketing fund audit report within 30 days of the preparation of the audit report;
  • Failing to give seven days’ notice of termination on the grounds of the special circumstances listed in section 29(1) of the Franchising Code; and
  • Requiring franchisees to undertake significant capital expenditure unless it’s for expenditures listed in section 30(2) of the Franchising Code.

What you need to do

As always franchisors will need to ensure that they are in compliance with the franchising code but they will need to pay special attention to those obligations which now attract civil penalties and those provisions which have had their penalties doubled. This will necessarily require a review of the franchising agreement and also the franchisor’s procedures to ensure compliance with the strict time frames and requirements.

 

**The blog published by Rostron Carlyle Rojas is intended as general information only and is not legal advice on any subject matter. By viewing the blog posts, the reader understands there is no solicitor-client relationship between the reader and the blog published. The blog should not be used as a substitute for legal advice from a legal practitioner, and readers are urged to consult RCR on any legal queries concerning a specific situation.

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June 24, 2022 |

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