23 May 2013

Fines and new duties of disclosure and good faith recommended for the Franchising Code

by Richard Hoad, Bruce Lloyd

The Government will consult with franchisors and franchisees on the 18 recommendations in the Franchising Review's report.

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 its recommendations.

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 franchise system.

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 ex-franchisees)

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 dispute.

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 commercial interests.

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.

Other recommendations

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.

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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 communication. Persons listed may not be admitted in all States and Territories.