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
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
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
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
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
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