The mandatory Franchising Code of Conduct (the 2015 Code) which commenced on 1 January 2015, requires franchisors to provide a disclosure document to prospective franchisees setting out, amongst other things, the relevant experience of their officers.
The requirements for full and accurate disclosure of this type of information under the 2015 Code are being tested for the first time in proceedings in the Federal Court commenced by the ACCC against Morild Pty Ltd (the current Franchisor of the franchise known as “Pastacup”) and Mr Stuart Bernstein, the principal behind the franchisor.
The Wein Review, which preceded the introduction of the 2015 Code, found that there was a need to improve disclosure for prospective franchisees. The Government accepted this recommendation (and indeed the majority of the Wein Review recommendations), which lead to many of the changes to the 1998 Code which are reflected in to the 2015 Code. In the context of the Morild case, ACCC Deputy Chair Dr Michael Schaper said
“People who decide to buy into a franchise system often put their savings on the line and, in doing so, should be able to make informed business decisions on the basis of full and accurate disclosure by the franchisor”.
In its case against Morild Pty Ltd and Mr. Bernstein, the ACCC alleges that Mr Bernstein failed to disclose that he had been a director of two previous franchisors of the Pastacup system that became insolvent.
The ACCC is seeking penalties of up to $54,000 against Morild Pty Ltd and Mr Bernstein, which is ultimately determined by the Court. Infringement notices can also be issued by the ACCC, where the ACCC has reasonable grounds to believe that a person has breached a penalty provision of the Franchising Code. The fines that may be issued under an infringement notice can be up to $9,000 for body corporates or $1,800 for individuals per breach.
The ACCC’s action is a timely reminder to all franchisors to revisit their franchise documentation to ensure compliance with the 2015 Code, as the ACCC has publicly declared that enforcement of the 2015 Code is currently a priority for it.
HopgoodGanim Lawyers’ Corporate Advisory & Governance team have a deep understanding of the legal and commercial issues facing the franchising industry. Whether you are a franchisor, a franchisee, or a potential franchisee, we can assist you. We will issue further alerts as the ACCC’s action winds its way through the legal process.
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