New franchising penalty regime comes into effect

The Franchising sector has recently seen significant regulatory change. In particular, a new penalty regime comes into effect in mid-April (which has brought with it a number of other minor amendments to the Franchising Code[1]). In addition to this new regime, the Franchise Disclosure Register has gone ‘live’ (but not yet to the public).

The new penalty regime

The Competition and Consumer (Industry Codes – Franchising) Amendment (Penalties and Other Matters) Regulations 2022 (Penalty Regulations) were published in mid-March 2022.  

In line with the new penalties available under the Treasury Laws Act 2021, and the findings of the 2019 Fairness in Franchising Report, the Penalty Regulations amend the Franchising Code to increase the maximum civil penalties available for certain contraventions and to introduce new penalty provisions for a number of existing obligations. The new penalty regime commences on 15 April 2022 and applies to contraventions occurring on or after that date.                              

A new clause 5A, inserted into the Competition and Consumer Act 2010, introduces the maximum penalty (New Maximum Penalties) for breaching obligations under the Franchising Code, depending on the benefit derived by a body corporate and its annual turnover, which may be the greater of: 

• $10 million (or for contraventions by an individual or a person who is not a body corporate, $500,000);
  
  
• if a 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 attributed to the contraventions - three times the value of that benefit; or
  
  
• if a court cannot determine the value of that benefit - 10 per cent 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.

There are now seven clauses under the Franchising Code which can attract the New Maximum Penalties:

• subclauses 17(1) and 17(2), which contain the obligations for franchisors to disclose materially relevant facts before a prospective franchisee enters into a franchise agreement (or within a reasonable time after the franchisor becomes aware of them);
  
  
•  clause 33, which gives franchisees and prospective franchisees the freedom to form associations;
  
  
•  subclauses 46A(1), 46A(2) and 46A(3), that require new vehicle dealership agreements to provide for compensation in the event of early termination; and
  
  
•  clause 46B, which requires that a franchisor not enter into a new vehicle dealership agreement unless the agreement provides a reasonable opportunity for a return on the franchisee’s investment.

In addition to the seven clauses above, the Regulations also doubled the civil penalty from 300 to 600 penalty units (currently $133,200) for 48 additional clauses and subclauses in the Franchising Code. These are summarised in Table 1 below.

Table 1: Summary of provisions subject to increased civil penalties

Clauses and subclauses	Overview of relevant obligation(s)
Subclauses 6(1), 6(4) and 6(5)	Requirement of both parties to act in good faith, and the prohibition on a franchise agreement purporting to limit this obligation.
Subclauses 8(1), 8(6), 8(8), 9(1), 9(2), 9(2A), 9A(2) and 9A(4)	Franchisor’s obligations in respect of disclosure documentation, which must be provided before entry into a franchise agreement and upon renewal or extension of a franchise agreement.
Clause 11	Requirement that the franchisor provides a copy of the Information Statement to a prospective franchisee (i) as soon as practicable (and not later than 7 days) after the franchisee expresses their interest in acquiring a franchised business; and (ii) before formal disclosure of more detailed documents.
Subclauses 13(1), 13(2), 13(2A), 13(2B), 13(3), 13(4), 13(4A), 13(4B), 14(1) and 15(2)	The franchisor’s disclosure obligations when entering into a franchise agreement.
Subclause 15(4)	Requirement that the franchisor disclose financial statements of the marketing or cooperative fund administrator to improve accountability.
Subclause 16(1)	Requirement that the franchisor provide a copy of the disclosure document upon request by the franchisee.
Subclauses 18(2), 18(3) and 19A(1)	The franchisor’s notification obligations in respect of end of term arrangements and record keeping.
Subclauses 26(3), 26A(4), 26A(6) and 27(2)	Obligations in relation to the termination of a franchise agreement.
Subclause 28(3)	Provision of reasonable written notice before terminating a franchise agreement, where the franchisee has not breached the agreement.
Subclauses 29(2) and 30(1)	Provision of termination notices and capital expenditure obligations.
Subclauses 31(2), 31(3), 31(4) and 32(3)	Obligations in respect of franchise agreements that require the franchisee to pay money into a marketing fund and the obligations surrounding the nondisclosure of a former franchisee’s details.
Subclauses 41A(3) and 43B(8)	Requirement for each party to a dispute to attend the ADR process and, if escalation to arbitration is agreed, to attend that arbitration.
Subclauses 47(2), 47(3), 47(4) and 47(5)	Franchisor’s notification requirements in relation to the end of term obligations of a franchise agreement.

A number of other clauses have also had civil penalty provisions of 600 penalty units (currently $133,200) attached to them as well as minor drafting amendments made, including:

• clause 22 - prohibition on requiring the franchisee to pay the franchisor’s costs of settling any disputes;
  
  
• subclauses 25(2) and 25(6) - prohibitions on franchisor unreasonably withholding or revoking consent to transfer of a franchise agreement; and
  
  
• subclause 27(4) - prohibition on franchisor terminating the franchise agreement where a franchisee has remedied the breach within the relevant period.

Franchise Disclosure Register 

On 1 April 2022, the Franchising Code was amended by the Competition and Consumer (Industry Codes – Franchising) Amendment (Franchise Disclosure Register) Regulations 2022 (Register Regulations). 

The Register Regulations establish a framework for the Franchise Disclosure Register (Register) and require franchisors operating in Australia to create a ‘profile’ on the Register and publish particular disclosure information (which includes core information about the franchisor’s business). The franchisor may also choose to upload the franchisor’s disclosure document, the key fact statement and template franchise agreement.

Franchisors will have until 14 November 2022 to create a profile and publish the relevant disclosure information, and must then continue to ensure that the latest disclosure information is available on the Register. The Register is due to be available to the public from 15 November 2022.   

Franchisors risk civil penalties of 600 penalty units (currently $133,200) per contravention of the requirements to:

• disclose the required information on the Register; and
  
  
• keep that information up to date.

The Register Regulations also: 

• require that personal information and information related to a particular franchisee or a particular site being occupied by a franchisee must be redacted from the franchisor’s documentation; and
  
  
• permit the redaction of information that is of a commercial nature and is commercially sensitive (this potentially permits the redaction of a wider range of material beyond the information contained in the disclosure document related to rebates, which was the original scope of information that was previously able to be redacted in an exposure draft of the Register Regulations).

Recommended actions for franchisors

Franchisors should consider the following actions as a matter of priority:

• be mindful of the significantly increased penalties applicable to the contravention of many provisions of the Franchising Code from 15 April 2022; and
  
  
• by 14 November 2022, create a profile and upload the required information to the Register. Franchisors that upload their documents to the Register will also need to consider the information in their documents that must be redacted and the commercially sensitive information that they may choose to redact.