Services: Corporate & Commercial

What you need to know

  • The ACCC has instituted its first proceedings in the Federal Court of Australia for breaches of the disclosure requirements under the revised Franchising Code of Conduct.
  • Financial penalties are being sought against the franchisor, as well as an individual director of the franchisor, in relation to the alleged breach.
  • The ACCC's action is a timely reminder to all franchisors that it is critical to ensure their disclosure documents provide full and accurate disclosure to prospective franchisees.

A number of important amendments to the Franchising Code of Conduct (Code) took effect in January 2015. The changes included the introduction of increased requirements for disclosure to prospective franchisees before entering into a franchise agreement, as well as the ability for the Australian Competition and Consumer Commission (ACCC) to seek financial penalties for breaches of the Code.

Now, in a first for the ACCC, the regulator is seeking penalties against both a franchisor and its director over their alleged breach of their disclosure requirements under the Code.

The alleged breach

Morild Pty Ltd (Morild) is the franchisor of the Pastacup system, a pasta franchise with stores in Western Australia and New South Wales. The ACCC alleges that Morild, and Mr Bernstein, breached the Code by failing to disclose in the franchise disclosure document that Mr Bernstein had been a director of two previous Pastacup franchisors, both of which subsequently became insolvent.

The Code requires that franchisors disclose whether the franchisor, a director of a franchisor, an associate of a franchisor or a director of an associate has been bankrupt, insolvent or externally-administered in Australia in the last 10 years.

Along with financial penalties sought against both Morild and Mr Bernstein, the ACCC is seeking further relief including declarations, injunctions and costs.

A recap on the other amendments to the Franchising Code

The revised Code came into effect on 1 January 2015 and applies to any agreement which commenced, was renewed, transferred or varied in any way on or after that date. In addition to strengthening the disclosure requirements, the revised Code:

  • introduced an obligation for parties to act in good faith in their dealings with one another
  • introduced financial penalties and infringement notices for serious breaches of the Code
  • requires franchisors to provide prospective franchisees with a short information sheet outlining the risks and rewards of franchising
  • requires franchisors to provide greater transparency in the use of and accounting for money used for marketing and advertising and to set up a separate marketing fund for marketing and advertising fees
  • requires additional disclosure about the ability of the franchisor and a franchisee to sell online
  • prohibits franchisors from imposing significant capital expenditure except in limited circumstances.

The ACCC can now seek fines of up to $54,000 for breaches of the penalty provisions of the Code through the court. In addition, the ACCC has the power to issue infringement notices (colloquially referred to as 'speeding tickets') in the amount of $9,000 for a corporation, and $1,800 for individuals and other entities per breach without the need to go to court.

Priority area for the ACCC

The ACCC has stated that one of its priority areas for 2016 is ensuring small business receives the protections of industry codes of conduct, including the Code. Franchisors are on notice that the ACCC is ready, willing and able to take action where it considers there have been breaches of the Code.

The ACCC's action against Morild and Mr Bernstein serves as a reminder of the need for franchisors to ensure their disclosure documents provide full and accurate disclosure to prospective franchisees. It is also critical for franchisors to be aware of their other obligations under the revised Code, as well as under Australia's competition laws.

This article is intended to provide commentary and general information. It should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this article. Authors listed may not be admitted in all states and territories