Franchising Code Compliance

Complying with the Franchising Code of Conduct

The Franchising Code of Conduct (the Franchising Code) is a mandatory set of rules that all Australian franchisors must comply with.

The Australian Competition and Consumer Commission (ACCC) administers the Franchising Code. 

The ACCC has the power to issue infringement notices (like on the spot fines) and seek substantial penalties against franchisors who fail to comply with the Franchising Code.

As of 7 November 2024, the penalty which may be sought by the ACCC under an infringement notice is $19,800.00 and the maximum penalty which may be sought by the ACCC for the failure to comply with a provision of the Franchising Code (attracting a penalty of 600 units), is $198,000.00. 

To comply with the Franchising Code, franchisors must:

• act in good faith;
• comply with disclosure obligations;
• annually update the disclosure document;
• ensure that franchise agreements comply with the Franchising Code;
• meet marketing fund/specific purpose fund financial reporting requirements;
• follow dispute resolution procedures.

 

Further Reading

What is the Franchising Code of Conduct?

Infringement Notice Penalties

What is Good Faith in Franchising?

Documents to be Provided to A Franchisee

Understanding Disclosure Documents

Penalties if Disclosure Documents don't Comply

Franchise Marketing Fund Compliance

 

Act In Good Faith

The Franchising Code provides that "each party to a franchise agreement must act towards each other with good faith, within the meaning of the unwritten law". 

While the Franchising Code does not define “good faith”, it provides that when assessing whether a party has acted in good faith, a Court may consider if:

• a party acted honestly and not arbitrarily;
• a party co-operated to achieve the purpose of the franchise agreement.

Some of the elements of good faith include:

• honesty;
• fairness;
• not acting arbitrarily;
• co-operating to achieve the purpose of the franchise agreement;
• reasonableness;
• having regard to the interests of the other party.

 

Legitimate Business Interests

While a party must take into account the interests of the other party, the obligation to act in good faith does not prevent a party from acting in its own legitimate commercial interests.

Consequently, a party is not required to act in the interests of the other party at the expense of its own interests.

The ACCC’s view is that conduct is prohibited where it harms the franchisee but it is not necessary for the protection of the franchisor’s interests. The Federal Court of Australia has accepted that view.

 

Examples of conduct that may show a lack of good faith

The ACCC in it’s Franchisor Compliance Manual has indicated that the following conduct may raise concerns under the obligation of good faith:

• a franchisor treating a franchisee differently to other franchisees because the franchisee has raised concerns about the system.
• a franchisor raising numerous minor and immaterial breaches with a franchisee in an aggressive and intimidatory manner designed to extract concessions or cessation of complaints.
• franchisees using confidential information provided by the franchisor to compete with the franchisor.
• franchisees using social media to post negative comments about the franchisor or their dispute with the franchisor.
  
  

Penalties - Failure to Act in Good Faith

The maximum Civil Penalty under the Code for a failure to act in good faith is 600 penalty units, or $198,000.00.

 

 

Disclosure Document

 

A franchisor must create a disclosure document relating to a franchise that complies with the Franchising Code. The disclosure document must be in the form set out in Annexure 1 to the Franchising Code.

A disclosure document includes information such as:

• details of all the current franchisees in the franchise system,
• details of the franchisees that have left the system in the last three years,
• details of any relevant legal action that is being taken against the franchisor, 
• the financial and business details of the franchisor, 
• details of the costs and fees required to commence and operate the franchise;
• details about supplier arrangements (including rebates); and
• from 1 November 2025, details about specific purpose funds (previously marketing funds). 

After a franchisor enters into a franchise agreement, the franchisor must update the disclosure document within 4 months of the end of each financial year.

A franchisor does not need to update the disclosure document after the end of the financial year if:

• the franchisor entered into one or less franchise agreements during the financial year; and
• the franchisor does not intend to enter into another franchise agreement in the following financial year.
  

 

Penalties - Failure to Create or Update Disclosure Document

The maximum Civil Penalty under the Code for a failure to create a disclosure document and then update the  disclosure document (if it is required) is 600 units (or $198,000.00). 

 

Comply with Disclosure Obligations

Disclosure arguably forms the foundation to compliance with the Franchising Code. The Franchising Code requires Franchisors to provide a franchisee with certain documents (including a disclosure document), and to disclose certain matters to a franchisee both before and after a franchisee enters into a franchise agreement.

 

Information Statement

A copy of the information statement relating to franchising which is published on the ACCC's website must be provided to a prospective franchisee as soon as practicable after the prospective franchisee formally applies, or expresses an interest in, buying a franchise business.

 

Penalties - Failure to Provide Information Statement

The maximum Civil Penalty under the Code for a failure to provide and information statement is 600 units (or $198,000.00). 

 

 

Documents to be provided before franchise

At least 14 days before a franchisee (or prospective franchisee) enters into, renews (subject to section 23(4) of the Franchising Code^*), or extends a franchise agreement, a franchisor must give the franchisee (or prospective franchisee):

• a copy of the franchise agreement in the form it is to be executed,
• a copy of the disclosure document relating to the franchise (in the form set out in the Franchising Code),
• a copy of the Franchising Code.

In addition to the documents set out above, if the premises are leased to the franchisor, or an associate of the franchisor, and the franchisor, or the franchisor's associate proposes to sublease the premises to the prospective franchisee for the purposes of a franchised business, (or proposes to permit the prospective franchisee to occupy the premises without a lease), the franchisor must give to the prospective franchisee, at least 14 days before the prospective franchisee enters into, renews (subject to section 23(4) of the Franchising Code) or extends a franchise agreement, a copy of:

• the lease of the premises (or if the franchisor is not in possession of the lease, a summary of the commercial terms, including any lease incentives);
• any disclosure information relating to the lease.

^*Section 23(4) of the Franchising Code provides that a prospective franchisee may opt out of being given the disclosure document, if the franchisee has another franchise agreement that is the same or substantially the same as the franchise agreement, and the business that is subject to the franchise agreement is the same or substantially the same. 

 

Penalties - Failure to Provide Documents

A failure to provide a franchisee or prospective franchisee with a copy of any of these documents as required by the Franchising Code may attract a civil penalty of 600 units (or $198,000.00).

 

 

 

Disclosure after Franchise Agreement

While the Franchising Code requires a franchisor to provide significant disclosure to a prospective franchisee before the franchise agreement is entered into, there are also matters which a franchisor must disclose to a franchisee after a franchise agreement is entered into. These matters include things such as:

• a change in the majority ownership or control of the franchisor; or
• certain proceedings commenced against the franchisor; or
• judgments awarded against the franchisor.  
  
  

Penalties - Failure to Disclose

A failure to disclose these matters to a franchisee, as required by the Franchising Code, may attract a civil penalty under section 34 of the Franchising Code (if the franchisor is a corporation), or a maximum civil penalty of $500,000.00 (if the franchisor is a natural person). 

Under section 34 of the Franchising Code, the maximum penalty (depending on the benefit derived by the company and its annual turnover) may be the greatest of:

• $10 million;
• if the Court can determine the value of the benefit that the body corporate has obtained by its contravention - 3 times the value of that benefit;
• if the Court cannot determine the value of that benefit - 10% of the annual turnover of the body corporate during the period of 12 months ending at the end of the month in which the contravention occurred.

What is a Franchise Agreement?

Specific Purpose Funds

Specific Purpose Funds under the Franchising Code are funds:

• controlled or administered by the franchisor (or an associate of the franchisor);
• to which franchisees are required to contribute under the terms of the franchise agreement;
• that must be used for a defined common purpose related to operating the franchise business. Examples include marketing, IT, upgrades, conferences or training programs.

The Franchising Code requires that a franchisor maintain a separate bank account for any specific purpose funds, in which funds paid by franchisees under the franchise agreement (for a defined common purpose) are held.

If the franchisor is operating any corporate sites, the franchisor must also contribute to the specific purpose fund on the same basis as its franchisees.

After 1 November 2025^*, an annual financial statement detailing all of the specific purpose fund's receipts and expenses for the last financial year will be required to be prepared within 4 months of the end of the financial year (generally 31 October).

The annual financial statement must be audited by a registered company auditor within 4 months of the end of the financial year to which it relates (generally by 31 October) unless 75% of the contributing franchisees have agreed otherwise before 3 months after the relevant financial year (generally 30 September).

A copy of the specific purpose fund financial statement, and a copy of the audit of the marketing specific purpose fund financial statement (if required) must be provided within 30 days of the preparation of the financial statement and the audit respectively.

 

Penalties - Specific Purpose Funds

The maximum civil penalty for a failure to comply with the provisions of the Franchising Code relating to the preparation of specific purpose fund financial statements and the audit of the market fund financial statements (if required) is 600 units (or $198,000.00).

In addition, the maximum civil penalty for the failure to provide a franchisee with a copy of the specific purpose fund financial statement and a copy of the audit as required by the Franchising Code is 600 units (or $198,000.00).  

For the financial year ended 30 June 2025, Franchisor's will be required to prepare a Marketing Fund Statement, and have the Marketing Fund Statement audited (if required).

 

 

 

Franchise Agreement Provisions

The Franchising Code requires franchise agreements to contain (or not to contain) certain provisions.

 

Cooling Off

A franchise agreement must contain a 14 day cooling off period for franchisees (the cooling off period will be further extended in certain circumstances if the franchise business is operated from a site).

 

Releases

A franchise agreement must not contain clauses that release the franchisor from general liability.

A franchise agreement must not contain or require a franchisee to sign, a waiver of a representation made by the franchisor.

 

Penalties - Releases

This is a penalty section of the Code (600 penalty units).

Legal Fees

A franchise agreement can contain a one off fixed legal fee paid by the franchisee before the franchise enters into the franchise agreement if:

1. the amount is specified in the franchise agreement;
2. the amount is clearly stated as being for the franchisor's legal costs related to preparing, negotiating or executing the agreement;
3. the amount excludes any legal costs for documents after the agreement is entered into;
4. the amount represents reasonable and genuine costs.

A franchise agreement must not contain a provision that requires franchisees to pay legal costs of the franchisor that are in respect of documents prepared after the franchise agreement is entered into, such as breach notices, termination notice or renewals.

A franchise agreement must not contain a provision that requires franchisees to pay legal costs of the franchisor associated with settling disputes.

Penalties - Legal Fees

These are penalty sections of the Code (600 penalty units).

 

 

Dispute Resolution

A franchise agreement must contain a dispute resolution clause in the form set out in the Franchising Code.

What is dispute resolution in franchising?

 

Restraint of Trade

A franchise agreement entered into after 1 April 2025, must not include a restraint of trade clause that applies after the franchisee has sought renewal of the franchise agreement and met the required conditions, but the franchisor has declined to renew the franchise agreement.

 

Penalties - Restraint of Trade

This is a penalty section of the Code (600 penalty units).

Restraints of Trade in Franchising

 

Compensation for Early Termination

A franchise agreement entered into after 1 November 2025 must provide compensation for early termination of the franchise agreement due to the franchisor withdrawing from the Australian market, rationalising networks or changing distribution models.

 

Penalties - Failure to Provide Compensation

This is a penalty section of the Code (600 penalty units).

 

Return on Investment

A franchise agreement entered into after 1 November 2025 must provide franchisee with a reasonable opportunity for a return on their investment.

 

Penalties - Failure to Provide Return On Investment

This is a penalty section of the Code (600 penalty units).

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