The Franchising Code of Conduct
The Franchising Code of Conduct ("the Code") is a mandatory industry code prescribed under section 51AD of the Competition and Consumer Act 2010 ("the Act"). Its purpose is to regulate the conduct between participants in franchising.
There are no penalties within the Code itself dealing with a breach of the Code itself. However, if the Code is breached this will constitute a breach of section 51AD of the Act which prohibits a corporation from contravening an applicable industry code. Breaching section 51AD may attract pecuniary penalties, injunctions and / or damages.
Obligations for Disclosure under the Code
Since the Code amendments in 2008 and 2010, a franchisor's obligations for disclosure of information to franchisees have increased. This appears to have arisen out of a concern that franchisees were not receiving the information they required in order for them to make an informed decision as to whether or not they should enter into a franchise agreement. What is the risk if a Franchisor does not comply with disclosure?
Ketchell1 dealt with the consequences of a technical breach of the Section 11(1) of the Code which requires the franchisor to obtain a written statement from a franchisee acknowledging they had at least 14 days to read and understand the disclosure document and had sought or had the opportunity to seek legal, financial or accounting advice. The franchisor breached the Code as it failed to obtain the required statement. The High Court decision in this case confirmed that although a technical breach of the Code by a franchisor would not result in the dire consequence of a franchise agreement being declared void or illegal; non compliance with the Code would still have the result of giving a franchisee the opportunity to complain, to bring an action for breach of the Code, and depending on the circumstances of the breach and its effect on a franchisee, to also bring any number of actions under the Act.
For example, not complying with:
- The requirement to provide at least 14 days of disclosure to a franchisee before it enters into a franchise agreement or prior to a franchisee proposing to renew, extend or extend the scope of a franchise agreement will breach section 10 of the Code but can also give rise to an action under section 21 and 22 of the Australian Consumer Law provisions of the Act. The franchisee may claim the franchisor's conduct was unconscionable as it was pressured or perhaps not given the opportunity or time to adequately assess whether or not it should have entered into the franchise agreement; or
- The requirement to give a franchisee or prospective franchisee a current disclosure document in a prescribed form will breach section 6 of the Code but can also give rise to an action under section 18 of the Australian Consumer Law provisions of the Act. The franchisee may claim the franchisor's conduct was misleading and deceptive and that it relied on the content of the disclosure document later found not to be current or correct.
Non compliance with the Code exposes the franchisor to a greater range of penalties, damages, orders, injunctions and remedies that potentially go beyond what would be imposed for a breach of the Code itself. A number of actions can be brought against the franchisor under the Act by a private party or the ACCC including actions against those found to be aiding and abetting a breach of the Code. This could include directors of the franchisor.
Investigation and enforcement powers of the ACCC
With the recent amendments to the Act, the investigation and enforcement powers of the ACCC have increased, giving it the ability to:
- Undertake random audits of franchisors following either a breach by the franchisor of the Code or a complaint about the franchisor's conduct. The ACCC can also audit without reason or cause other than to ensure compliance with the Code generally;
- Issue substantiation notices requiring a franchisor to respond and substantiate claims made and / or to produce documentation. This may follow the findings of an audit or it may follow a complaint from a franchisee or group of franchisees;
- Issue infringement notices requiring payment of penalties. These can be issued for a failure to respond to substantiation notices or for matters that the ACCC feel are minor but which justify a penalty. Failure to respond can also result in further investigation;
- Issue public warning notices about the conduct of a franchisor if the ACCC believes it is in the public interest to issue such a warning;
- Seek court orders to redress loss and damage suffered by non-parties in relation to conduct by franchisors in contravention of the Code. This will allow legal proceedings to commence without requiring aggrieved franchisees to be parties to the proceedings.
Whether you have received a complaint or not or whether you feel that a minor non compliance with the Code would not significantly affect a franchisee, the reality after Ketchell is that any evidence of non compliance can expose a franchisor to risk. The ACCC has the ability to investigate and audit franchisors without cause or complaint. Internal practices or documentation in breach of the Code that comes to the attention of the ACCC can potentially expose the franchisor not only to an action for breach of s51AD but to any number of actions under the Act; including the possibility of being exposed to unfavourable and damaging public scrutiny of the brand and franchise system.
The best course of action is to ensure that you always comply with the Code, to seek advice if you are not sure of your compliance and to have in place a compliance program with appropriate procedures and resources to immediately deal with a complaint or with a random audit or investigation by the ACCC should either arise.
1 Master Education Services Pty Ltd v Ketchell (2008) 236 CLR 101.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.