Franchisors should be aware of risk of large penalties

We have been examining situations in which Franchisors may incur a $10,000,000 penalty or similar for a breach of the Franchising Code of Conduct.

The Franchisor may also incur these penalties in the following situations:

1.       There is a change in the majority ownership or control of the Franchisor, an associate of the Franchisor, or the Franchise System.

2.       Proceedings are commenced by a public agency, judgement is handed down in a criminal or civil proceeding or an award in arbitration against the Franchisor, a Franchisor director, an associate of the Franchisor, or a director of an associate of the Franchisor, in Australia alleging:

·         A breach of a Franchise Agreement;

·         Contravention of Trade Practices Law;

·         Contravention of the Corporations Act 2001;

·         Unconscionable conduct;

·         Misconduct; or

·         An offence of dishonesty.

Important to note is that the provision relates to proceedings being commenced by a public agency and is not triggered upon judgement being handed down.

This means that the Franchisor must notify Franchisees within 14-days of any of these occurring including the institution of proceedings by a public agency.

The Franchisor must also give notice to Franchisees within 14-days of civil proceedings being instituted against the Franchisor, a Franchisor director, an associate of the Franchisor, or a director of the associate of the Franchisor by at least 10%, or 10, of Franchisees in Australia (whichever is the lower).

Again, note that this relates to proceedings being commenced.

The provision is triggered based on a percentage of franchisees which will be triggered by a small number of franchisees instituting proceedings in the smaller systems.  For instance, if a Franchisor only had two Franchisees and one Franchisee institutes proceedings, then in those circumstances 50% of Franchisees have instituted proceedings and the Franchisor is required to advise the other Franchisee in writing within 14-days of those civil proceedings being commenced.  

It may be difficult for Franchisors to remember that these notifications need to be given especially in circumstances where they no doubt have other matters to grapple with at the time.