On 1 January 2015 a new Franchising Code of Conduct (the Code) was introduced. It applies to all conduct on or after 1 January 2015. If a franchise agreement has been entered into after 1 October 1998, but before 1 January 2015, the new Code still applies with certain exceptions. If such a franchise agreement is transferred or varied on or after 1 January 2015, the entire Code will then apply.
The new Code has made substantial changes to the law of franchising. This article looks at one aspect – the introduction of a new penalty regime which commences from 1 January 2015. The new penalty regime will apply even if the franchise agreement was entered into before 1 January 2015.
Civil penalties under the Code
The Code contains 24 provisions which, if breached, can result in a civil penalty (a fine is imposed but it is not a criminal offence). The maximum penalty is 300 penalty units ($51,000). The Australian Competition and Consumer Commission (ACCC) enforces these provisions.
As an alternative to prosecuting a breach of the Code, the ACCC can issue infringement notices, which must be issued within 12 months of the alleged contravention. In order to issue an infringement notice, the ACCC must have reasonable grounds to believe that a person has contravened a civil penalty provision of the Code.
An infringement notice is supposed to be a cheap and easy solution to an infringement. It imposes a penalty of 50 penalty units ($8,500) for a corporation, or 10 penalty units ($1,700) for an individual, and is payable within 28 days. Payment of the notice does not amount to an admission of liability. However, paid infringement notices are kept on a searchable public register on the ACCC website. If the recipient fails to pay the notice, the ACCC may take it to court for the alleged contravention.
Of the 24 civil penalty provisions, only two can be breached by both the franchisor and the franchisee:
- Breach of the obligation to act in good faith, and
- Failure to attend a mediation.
All the rest involve breaches by the franchisor (or, in certain cases) an associate.
Act in good faith
An express obligation to act in good faith is newly introduced to the Code. Its definition refers to unwritten law (judge-made case law), although some guidance is given. The Code provides that a court can have regard to:
- whether the party acted honestly and not arbitrarily, and
- whether the party cooperated to achieve the purposes of the franchise agreement.
The obligation to act in good faith cannot be excluded. Nonetheless the obligation does not prevent parties acting in their legitimate commercial interest. Failure to give an option to renew or failure to extend a franchise agreement does not amount to lack of good faith on the part of the franchisor.
For a breach of the obligation of good faith to incur a penalty, and for the ACCC to be able to issue an infringement notice with respect to an alleged breach, seems strange as case law does not have a clear definition of good faith. It may well be that a judge will know a breach of the obligation of good faith when he/she sees it.1 However, franchisors and franchisees will need more guidance than that. The ACCC has posted in its Franchisor Compliance Manual to be found on its website some questions to be asked when considering whether there has been a breach of the obligation of good faith:
- Have you been honest with the other party?
- Have you considered the other party’s interests?
- Have you made timely decisions?
- Have you consulted with the other party regarding proposed changes?
- Are you imposing any conditions on the other party that aren’t necessary to protect your interests?
- Where a dispute has arisen, have you attempted to resolve the dispute (either directly with the other party, or through mediation)?
- Are you acting for some ulterior purpose?2
The obligation to act in good faith applies not only to the franchisee and franchisor but also to persons who propose to be a party to a franchise agreement. However their lack of good faith is not subject to a civil penalty.
Many of the remaining civil penalty provisions relate to the information required to be provided by the franchisor as outlined below:
- Obligation to create a disclosure document complying with the Code and provide it upon request (subject to a grace period until 31 October 2015 for existing disclosure documents, although if existing documents are misleading they would be subject to potential remedies for misleading and deceptive conduct);
- Obligation to update the disclosure document within four months of the end of the financial year;
- Obligation to give certain documents before the franchisee or prospective franchisee enters into the franchise or pays a non-refundable payment or renews or extends the scope of the franchise;
- Obligation to give a copy of any lease or licence documents and details of related financial incentives;
- Obligation to give copies of any other agreements that the franchisee or its associates must enter;
- Obligation to have audited and provide annual financial statements of the marketing or other co-operative fund;
- Obligation to provide certain financial information and other information required to be disclosed in clause 17;
- Obligation to advise the franchisee whether the franchisor intends to extend the franchise agreement or enter into a new franchise agreement, including the obligation to advise the franchisee of its right to request a disclosure statement.
The franchisor is also subject to a civil penalty provision if it:
- fails to repay consideration paid by a franchisee who terminates during the cooling off period;
- fails to give a notice of intention to terminate that includes a reasonable opportunity to remedy the default;
- terminates the franchise agreement in accordance with the agreement without the consent of the franchisee other than for breach unless the franchisor gives reasonable notice for the termination and reasons for the termination (except where termination is permitted under clause 29);
- discloses a former franchisee’s details to a prospective franchisee against the wishes of the former franchisee;
- tries to influence a former franchisee either to make or not make a request that the former franchisee’s details not be disclosed to a prospective franchisee;
- attempts to restrict or impair a franchisee or prospective franchisee’s ability to form an association or associate with other franchisees or prospective franchisees for a lawful purpose.
The imposition of these civil penalties is clearly aimed at better enforcement of the Code. Disgruntled franchisees can bring their grievances to the ACCC which can act swiftly by issuing an infringement notice rather than bringing full legal proceedings. For more serious breaches legal proceedings to recover a higher penalty may still be in order, and a failure to comply with an infringement notice may also result in legal proceedings.