Australia: Amendments to the Franchising Code – Are Your Disclosure Documents Compliant?
Franchising Update

On 3 June 2010, the Government released the Trade Practices (Industry Codes – Franchising) Amendment Regulations 2010 made under section 172 of the Trade Practices Act 1974 (Regulations). The Regulations give effect to the Government's proposed reforms to the Franchising Code outlined in our March 2010 update, which you can view here.

In essence, the Regulations increase franchisors' disclosure obligations, providing clearer information upfront to prospective franchisees about the franchise system. The Regulations will commence on 1 July 2010 and franchisors are responsible for ensuring that their disclosure documents incorporate the additional disclosure requirements.

A full copy of the Regulations is available here, however we list the key changes below.

Additions to the Franchising Code

• Pre-expiry notice: a new clause will be inserted into the Code requiring franchisees to notify the franchisor, at least six months prior to expiration of their franchise agreement, of their decision to renew or not to renew their franchise agreement.
• Good faith: a new clause will be inserted to provide that nothing in the Code limits the obligation imposed by the common law on parties to act in good faith.
• Dispute resolution: the Code will incorporate a non-exhaustive list of behaviours expected of franchisors and franchisees when engaging in the dispute resolution process. These include participating in meetings, observing confidentiality obligations and preserving the reputation of the franchise system pending the resolution of a dispute.

Additional disclosure requirements for franchisors

• Franchise business failure: franchisors are to provide a statement in their disclosure document that franchising is a business and, like any business, the franchise could fail.
• Other payments: franchisors must disclose to prospective franchisees, to the extent they are reasonably able to do so, payments to be made by the franchisee to third parties. Third party payments might include stamp duty on agreements and licences or leases, legal fees and accounting fees.
• Unforeseen capital expenditure: franchisors must disclose to franchisees whether or not they will require them to undertake significant capital expenditure that was not foreseen (and therefore not disclosed) before entering the franchise agreement. Significant expenditure may include shop re-fits, new capital equipment or implementation of IT infrastructure.
• Unilateral contract variation: franchisors must disclose to franchisees any unilateral variations to a franchise agreement in the last three financial years and the circumstances in which any unilateral variations may occur in the future.
• Confidential obligations: franchisors must disclose to franchisees the type of information that must remain confidential, including settlement of disputes, intellectual property and trade secrets.
• End of agreement arrangements: franchisors must disclose to franchisees the process that will apply at the end of the agreement, including any options to renew or extend, the franchisee's entitlement to exit payments, the franchisee's right to sell the business and treatment of unsold stock and equipment.

Implications for franchisors

Franchisors are required to update their disclosure documents annually, within four months of the end of the financial year (that is, by 31 October). In view of the above changes, franchisors must ensure that when updating their disclosure documents this year they are careful to include the additional disclosure requirements.

Gadens Lawyers can assist franchisors to review their disclosure documents to ensure they are compliant with the new Regulations, as well as advise prospective franchisees on their legislative rights and entitlements when entering into a franchise system.

For more information, please contact:

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.