The Franchising Code of Conduct ("the Code") is a mandatory industry code of conduct that has the force of law under the Trade Practices Act 1974 (the "Act"). The Code regulates the relationship between franchisors and franchisees and aims to ensure potential franchisees have sufficient information before entering into a franchise agreement.
On 1 July 2010 the most recent amendments to the Code came into effect. These amendments particularly focused on the information that a franchisor must disclose to franchisees. These amendments will apply to franchise agreements entered into or renewed after 1 July 2010. This article looks at the new requirements for the Disclosure Document and some of the operational changes that flow from the recent amendments.
The Disclosure Document
The purpose of a Disclosure Document is:
- To give to a prospective franchisee, or a franchisee proposing to enter into, renew, extend or extend the scope of a franchise agreement, information to help the franchisee make a reasonably informed decision about the franchise
- To give a franchisee current information that is material to the running of the franchised business.
A franchisor should keep this purpose in mind when preparing its Disclosure Document along with the prohibition on misleading and deceptive conduct under section 52 of the Act.
The new requirements for information that the franchisor must include in a Disclosure Document include:
- Payments – significantly greater disclosure of all types of costs associated with running the franchise.This includes those payments that are reasonably foreseeable by the franchisor as payable by the franchisee to a person other than the franchisor. The types of costs caught by this requirement would include utilities such as water and electricity as well as office equipment and stationary.To satisfy this requirement, a franchisor will probably have to rely on information supplied by its existing franchisees. Franchisors may provide upper and lower limits for various costs
- Unforeseen significant capital expenditure – the franchisor will need to disclose whether the franchisee will be required (through the franchise agreement, the operations manual or any other means) to undertake unforeseen significant capital expenditure that was not disclosed by the franchisor before the franchiseeentered into the franchise agreement. Items such as shop refits, new branding or equipment upgrades could be disclosed under this requirement
- Dispute resolution – a franchisor must disclose if the franchisee will be required to pay the franchisor's costs of any dispute resolution proceedings
- Unilateral variation – details of any terms of the agreement providing a franchisor with a right to vary the franchise agreement unilaterally must be disclosed. Further, if the franchisor has exercised that right since 1 July 2010 then details of the unilateral variations must be included
- Confidentiality – details of any terms of the agreement imposing confidentiality requirements on the franchisee must be disclosed This has particular relevance to the mediation process as often the parties will want to keep the substance of any mediation confidential
- End of term arrangements – the
disclosure requirements for end of term arrangements are quite
complex, including disclosure of any:
- Options to renew or extend
- Exit payment calculations
- Arrangements for unsold stock, equipment and other assets
- Any right of the franchisee to sell the business and any franchisor first right of refusal
- The effect of any significant capital expenditure undertaken by the franchisee during the term.
- Amendment on transfer: The franchisor must disclose if the franchisor will amend (or require the amendment of) the franchise agreement on or before the transfer or novation of the franchise.
The recent amendments to the Code also introduced certain operational changes. In brief, these include:
- The provision of a Disclosure Document to a franchisee, if the franchisor or the franchisee proposes to renew, extend, or extend the scope of the franchise agreement. The phrase 'extend the scope' is likely to catch any change to the territory of a particular franchisee and could also include material changes in the products or services sold by the franchise network
- The section of the Code setting out the circumstances that permit a franchisor to withhold consent to an assignment will now clearly apply to novations as well. A franchisee has the right to request the
- franchisor to consent to the novation of the franchise agreement on the same terms. This means the common clause requiring an incoming transferee to sign the "then current form of the franchise agreement" as a condition of novation will not be as effective
- Franchisors must notify franchisees of their decision to renew or not renew their agreement, or to agree a new franchise agreement, at least six months prior to the expiry of the franchise agreement (or one month before the expiry of an agreement with a term of less than six months). There is nothing in the Code preventing the franchisor's decision to renew being conditional upon the Franchisee complying with any requirements set by the franchisor.
The Government rejected calls by various bodies to include a statutory good faith provision in the Code. Rather, a new clause was inserted in the Code stating that the Code does not limit any obligation to act in good faith that may be imposed by law. Consequently, the existence of a duty of good faith is not automatic and will continue to depend on the relevant circumstances of the case. However, a duty of good faith is often implied into franchise agreements.
Risk of non compliance
A non-compliant Disclosure Document can lead to the Australian Competition & Consumer Commission ("ACCC") or affected franchisees taking action against the franchisor. The Act provides various remedies for breaches of the Code including injunctions, compensation, damages, orders to set aside or vary the agreement, or orders to undertake corrective advertising. The ACCC will pursue misleading and deceptive conduct and unconscionable conduct in addition to breaches of the Code. If the conduct or breach shows a blatant disregard for the law, is widespread or causes significant detriment to consumers then the ACCC is particularly concerned and is more likely to take action itself.
Overall, the amendments to the Code substantially increase the information that must be disclosed to franchisees. Franchisors will need to become familiar with these amendments to the Code to ensure their Disclosure Document and operations remain compliant.
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.