Earlier this year the Australian Government appointed Mr Alan Wein to review the Franchising Code of Conduct (the Code). In his review Mr Wein was asked to make recommendations to ensure that the sector was operating in the best interest of all stakeholders. Over the years the sector and the Code have been through a number of reviews and whilst the review was scheduled, it received a mixed response from the different stakeholders.
In the next few weeks we will outline the 18 recommendations made and the Government's response on those recommendations and what they may mean for you.
Review of the Disclosure Document
The Code be amended so that the provision of a notice under clause 20A of the Code, if it states the franchisor's intention to renew a franchise agreement, triggers a requirement to provide disclosure. A franchisee should not be bound by its exercise of an option to renew prior to the provision of disclosure by the franchisor.
The Code currently provides that a franchisor must notify its franchisee at least 6 months before the end of the term of their franchise agreement, notice on whether they intend to renew or terminate the agreement. If the recommendation is adopted by the Government (which they have agreed to in principle) and the Code is amended accordingly there will be an obligation imposed on franchisors to remind franchisees that they are entitled to request a disclosure document at the time that they are served with a notice under clause 20A. Generally speaking a franchisee can request an updated disclosure document at any time in a 12 month period. However this obligation would go further in that it imposes a duty on a franchisor to advise the franchisee of this and to have a system in place that ensures updated disclosure information is provided to franchisees whose franchise agreements are about to expire in a timely manner so as to allow consideration by the franchisee to whether or not it chooses to exercise its option.
If the Code is also amended so that a franchisee is not bound by its exercise of an option unless disclosure has been made to it, then it would be prudent for a franchisor to issue to its franchisee an updated disclosure prior to the date that the franchisee has to exercise its option for renewal. Failing to do so, could mean that a franchisee is not bound to any exercise of option by it.
The code be amended:
- to allow a short-form disclosure document to be provided by a foreign or master franchisor to its master franchisee instead of the long-form disclosure document;
- to ensure that only franchisees who do not also act as franchisors are provided with the full-form disclosure, and
- to require a franchisor to provide to its franchisee a copy of the short-form disclosure document provided to it by its foreign or master franchisor.
Adopting this recommendation would significantly reduce the added cost and complexity to a franchise transaction that are normally incurred by a franchisee where a foreign or master franchisor is involved. Ultimately any reduction in the size of the disclosure document especially where a foreign or master franchisor is involved is a good thing and will help reduce the confusion and frustration felt by many franchisees when they receive their disclosure pack from their franchisor. The recommendation that foreign or master franchisors need not update their disclosure document annually would also help reduce the onerous obligation on franchisors to ensure that the disclosure document annexed to their disclosure document is up to date and current, especially when the cost and time factor involved in obtaining the same is significant.
The Code be amended to ensure that a franchisor discloses the rights of the franchisor and franchisee to conduct and benefit from online sales.
Whilst the Government has accepted this, the amount of information that a franchisor will be required to disclose to its franchisee is unknown. If it is simply a matter of disclosing the right to conduct and benefit from online sales, a franchisor could do this under the current disclosure document similar to how franchisors disclose any rebates which they receive. Depending on the extent of the information that will be required, a franchisor can choose to make a generic comment in relation to this point.
The Code be amended to remove the short-form disclosure document contained in Annexure 2.
The Government has accepted this amendment. The short-form disclosure document whilst rarely used by franchisors can be used when turnover is less than 50K. Removing the short-form disclosure document will mean that any franchisors currently using the form or any start up franchisors who want to use the prescribed form will need to instead use the long-form disclosure document. This could prove to be costly for a smaller franchisor or those staring up and who do not have the need as yet to use the long-form disclosure.
The Code be amended to require franchisors to provide prospective franchisees with a short key summary of key risks and matters that they should consider and be aware of when considering franchising.
The Government accepted this recommendation and supports the notion of providing franchisees with a risk statement at the earliest possible opportunity, even before the franchisor begins the necessary steps of introducing the franchisee to the franchise system. The Government has highlighted that this should not form part of the disclosure documentation, rather it should be a separate document similar to the Franchisee Advice Statement that is provided to franchisees. The document should address important issues such as:
- the need to consider whether the franchise system is a good fit;
- the importance of obtaining professional advice;
- the potential for a franchisee to incur unforeseen expenses, and
- the risk of franchising generally.
Any such statement should be general in nature and we suggest should include some form of disclaimer by the franchisor. Whether the Code will be amended to provide for this form of statement or whether it will be left to franchisors to determine what must be contained in such a statement, will determine what information the statement can contain. At the very least, it should contain an acknowledgment by the franchisee that it relies on its own enquiries and due diligence into the franchise system.
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.