The Franchising Code of Conduct (Code) is a mandatory industry code across Australia that regulates the conduct of franchisors and franchisees towards each other. The Code regulates many aspects of the franchising relationship, including pre-contractual and ongoing disclosure requirements, resolution of disputes, and procedures for ending a franchise agreement. The Code also requires current and prospective franchisees and franchisors to act in good faith in their business dealings with each other.
Recently passed legislation, Sch 2 of the Treasury Laws Amendment (2021 Measures No 6) Act 2021, commenced on 14 September 2021 and significantly increases the maximum civil penalties that can be prescribed for breaches of the Code.
Existing maximum penalties for breaches of the Code
Under the existing penalty provisions, the maximum penalty for a breach of a civil penalty provision of the Code is 300 penalty units (currently $66,600).
New maximum penalties for breaches of the Code
For companies, the new changes mean that the maximum pecuniary penalty for a contravention of a civil penalty provision that can now be prescribed is the greater of:
• $10 million
• three times the value of the benefit obtained by the company and its related bodies corporate, if the value of the benefit can be determined; or
• 10% of the annual turnover of the company in the preceding 12 months, if value of the benefit cannot be determined.
For individuals, the maximum pecuniary penalty that can now be prescribed for breaches of the Code is $500,000.
If the Code does not prescribe the maximum penalty set out above for companies or individuals, it may prescribe a pecuniary penalty not exceeding 600 penalty units ($133,200).
When do the new maximum penalties come into effect?
The Code has not yet been amended to increase the maximum civil penalties for breaches of the Code. This means the existing maximum penalties continue to apply for the time being.
While the amendments will potentially significantly increase the maximum civil penalties for breaches of the Code, the courts will continue to have a discretion to apply an appropriate penalty, taking into consideration all relevant matters. In practice, this would mean that the maximum penalty would only be applied in the ‘most egregious instances of non-compliance’ with the Code, as noted in the Explanatory Memorandum.
Recommendations for current or prospective franchising participants
These potentially higher penalties for contraventions of the Code raise the stakes for franchising participants. It is critical that all current and prospective franchisors and franchisees are aware of their obligations under the Code and take all necessary steps to ensure compliance.
If you require advice or assistance in understanding your obligations under the Code, or in preparing or reviewing your franchise agreements and disclosure documents to ensure compliance with the Code, please contact our team.