The Government will consult with franchisors and
franchisees on the 18 recommendations in the Franchising
The latest review of the Franchising Code has recommended some
significant changes, most notably the introduction of pecuniary
penalties for breaches, a new express obligation to act in good
faith, and changes to the duty of disclosure.
The review of the efficacy of the 2007 and 2010 amendments was
released publicly last Friday. The Government has said it will
consult with franchisors and franchisees on its 18 recommendations.
Industry bodies have welcomed the report, with both the Franchise
Council of Australia and Franchise Council of Australia endorsing
We set out the major changes below.
New pecuniary penalties as part of the enforcement armoury
For many years, there has been criticism of the fact that the
Code does not impose penalties for breaches. The review proposes
that breaches be punishable by pecuniary penalties of up to
$50,000. A breach of the Code could also be a trigger for a court
to disqualify a person from managing corporations.
The ACCC would also be given powers to issue an infringement
notice for a breach, and conduct random audits of a
franchisor's compliance with all aspects of the Code.
Courts would also be given new powers to make orders specific to
franchising, such as requiring a franchisor to give a royalty-free
period to a franchisee affected by a breach of the Code, or pay
money into any marketing or co-operative fund applicable to that
Different levels of disclosure
In 2008, the Government removed an exemption from the disclosure
requirements in the Code for foreign franchisors who grant a single
franchise in Australia. The review found that this reform has led
to an overly burdensome disclosure regime, particularly where a
foreign franchisor appoints a master franchisee in Australia who
then grants subfranchises. The review proposes to remedy these
concerns by allowing a foreign or master franchisor to provide a
short-form of disclosure to a master franchisee (rather than the
much greater level of disclosure usually required).
The review also proposes to increase disclosure requirements in
other respects by requiring franchisors to disclose:
the rights of the franchisor and franchisee to conduct and
benefit from online sales, including any ability of the franchisor
to conduct online sales; and
a short summary of the key risks and matters franchisees should
be aware of when going into franchising.
Lastly, if a franchisor gives notice of its intention to renew a
franchise agreement, it will also have to provide disclosure in
accordance with the Code.
Good faith (and confidentiality of contact details for
The review recommends that the Code be amended to include an
express obligation to act in good faith, which would cover:
the negotiation of a franchise agreement;
the performance of a franchise agreement;
the performance of obligations under the Code; and
the resolution of any disputes between the parties whether or
not there is a valid franchise agreement at the time of the
This obligation would not however be defined. Instead, the
nature and extent of the obligation would be determined by the
developing general law duty of good faith.
Applying both to franchisor and franchisee, this obligation
could not be limited or excluded by contract. Importantly, however,
it would not prevent a party from acting in its legitimate
It would also expressly exclude an argument that a franchisor
has not acted in good faith because there is no term in a franchise
agreement specifying a right of renewal.
Finally, the review makes a raft of recommendations on:
the consequences of franchisor failure;
prohibiting franchisors from imposing unreasonable significant
unforeseen capital expenditure;
the administration of marketing funds; and
the transfer, renewal or end of a franchise agreement.
Clayton Utz communications are intended to provide
commentary and general information. They 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 bulletin.
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