Key summary of the new regulations
The key changes include:
- a franchise agreement entered into on or after 1 July 1998 (formerly 1 October 1998) must not contain, or require a franchisee to sign, a general release of a franchisor from liability towards the franchisee.
- A franchisor's annual financial marketing (or other cooperative) fund statement does not need to be audited if 75% of the franchisor's franchisees in Australia who contribute to the fund vote that the franchisor does not have to comply with this requirement and this agreement was reached within 3 months after the end of the financial year. This agreement will remain in force for 3 years.
- a franchisee's request to the franchisor for a transfer or novation of the franchise agreement must be made in writing. A definition of "novation" has been introduced in the Code.
- if the term of the franchise agreement is greater than 6 months, a franchisor must notify its franchisee at least 6 months before the end of the term of its decision to renew or not renew the franchise agreement, or to enter into a new franchise agreement.
- if the term of the franchise agreement is less than 6 months, the franchisor must notify its franchisee at least 1 month before the end of the term of its decision to renew or not to renew the franchise agreement or enter into a new franchise agreement.
the complaint handling procedure will require parties to a dispute to approach the resolution of the dispute in a reconciliatory manner. The Code will provide a list of necessary behaviours, including:
- attending and participating in meetings at reasonable times,
- making each party's intention clear as to what they are intending to achieve through the mediation,
- observing confidentiality obligations during the mediation process,
- refusing to take, or alternatively taking, action during the dispute which may have the affect of damaging the franchise system.
- the costs of mediation have been clarified to include the following costs: mediator's fee, room hire and any additional input agreed to by the parties (such as expert reports).
A franchisor will be required to amend their disclosure document to include the following:
- a statement on the front page acknowledging that franchising is a serious undertaking and like any business the franchise or franchisor could fail during the term of the franchise agreement, which may have consequences for franchisees.
- details of recurring or isolated payments reasonably foreseeable by the franchisor that may be payable by the franchisee to a person other than the franchisor.
- whether it will require a franchisee to undertake unforeseen significant capital expenditure during the franchise term that was not disclosed by the franchisor before the franchisee entered into the franchise agreement.
- whether it will attribute its costs incurred in dispute resolution to the franchisee.
- the circumstances in which the franchisor has unilaterally varied a franchise agreement since 1 July 2010 and in circumstances in which the franchise agreement may be varied, unilaterally, by the franchisor in the future.
- whether it will impose a confidentiality obligation on the franchisee and details of same.
- details of the process that will apply in determining end-of-term arrangements for franchisees.
- whether it will amend the franchise agreement on or before transferring or novating the franchise agreement.
Despite much debate across the sector, the Code has also been amended to include an acknowledgement that nothing in the Code limits any obligation imposed by the common law on the parties to a franchise agreement to act in good faith.
Given the significance of these changes, it is not intended the Code be amended for another 3 to 5 years to allow the sector to consider the effectiveness of the changes.
Practical application of the new regulations
All disclosure documents and franchise agreements issued by a franchisor on and from 1 July 2010 must strictly comply with the new regulations. In addition, a pre-1 July 2010 franchise agreement that is transferred, renewed, extended or the scope is extended post-1 July 2010 must comply with the new regulations.
Given the short time frame, we recommend franchisors urgently consider their disclosure, franchising arrangements and internal procedures to ensure compliance with the new regulations from 1 July 2010.
The obligation to comply with the new regulations is in addition to the existing obligation that the franchisor update its disclosure document within 4 months from the end of the each financial year.
We recommend that franchisors combine their annual update of the disclosure document with steps to ensure Code compliance with the new regulations.
At an internal level, we recommend franchisors carefully consider and possibly their procedures regarding end-of-term arrangements, unilateral variation of franchise agreements and decisions regarding the renewal of franchise agreements.
Further changes likely to affect the franchising sector
We currently have a watching-brief in relation to the following:
- later this year the Trade Practices Act will undergo its own changes which will affect, amongst other things, the ACCC's power to conduct spot-audits on franchisors.
- the progress of the Franchising (South Australia) Bill 2009.
We will release further news bulletins as developments in the sector occur.
We can assist franchisors in implementing the changes to ensure a best practice standard is achieved and maintained.
If you would like any further information regarding the proposed changes please contact a member of our Franchising team to discuss.
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.