The Federal Government has drafted changes to the Franchising Code of Conduct (Code) and relevant sections in the Competition and Consumer Act 2010 (CCA). These changes, which are expected to start from 1 January 2015, have been released for a three week period of public comment and build on the review of the Code by Alan Wein last year. Associate Giselle Finnane and Paralegal Elizabeth Moran discuss the changes.
How does it affect you?
- From 1 January 2015, the Code changes will apply to franchise agreements either:
- entered into on or after 1 January 2015; or
- renewed on or after 1 January 2015.
- An express obligation for franchisors and franchisees to act in good faith has been introduced.
- Franchisors are now required to provide prospective franchisees with an information statement with an overview of the risks and rewards of franchising.
- The redundant short form disclosure document from Annexure 2 of the Code has been removed.
- There are additional penalties introduced for breaches of the Code.
- Franchisors need to review and update their franchise suite of documents to ensure that they will be in a position to be Code compliant when changes take effect.
Background to changes: Alan Wein Review 2013
During early 2013, an independent review of the Code was conducted by Mr Alan Wein. Submissions were received from various sectors of the franchising community, including franchisees, franchisors, lawyers and academics as well as industry associations. The terms of reference focused on the 2008 and 2010 amendments to the Code, in addition to:
- Good faith in franchising
- The rights of franchisees at the end of the term of their franchise agreements
- Provisions for enforcement of the code
On the basis of this review as well as further considerations and consultations with the sector, the Government has committed to refining the Code by looking for opportunities to reduce red tape, improving knowledge about commercial expectations and risks, rights and responsibilities.
'Future of Franchising' Statement – Key changes
Reducing red tape and unnecessary complexity in regulation
The government will amend the Franchising Code to clarify the meaning of certain provisions. Changes will include:
- The removal of the 'double disclosure' currently imposed on master and foreign franchisors
- Removal of disclosure obligations in relation to summarising provisions of the franchising agreement in the disclosure document, as such provisions make the disclosure document unnecessarily complex
- Removing the redundant short form disclosure document from Annexure 2 of the Franchising Code given that it is not used by the sector
- Making a range of other drafting improvements to improve consistency of practice
Improving information available to franchisees
This will include:
- Requiring franchisors to provide prospective franchisees with an information sheet with an overview of the risks and rewards of franchising
- Improving the disclosure of the online trading activities of franchisors
- Ensuring that franchisors remind franchisees that they are entitled to a current disclosure document when the franchisor indicates it intends to renew the franchise agreement
- Introducing greater transparency for the way in which marketing funds are used and accounted for
Strengthening the balance of power in franchise agreements
The review identified a number of areas in the Code which could be amended to strengthen the balance in franchise agreements. The proposed changes include:
- Enhancing protections for franchisees against significant capital expenditure imposed by the franchisor
- Preventing parties to a franchise agreement from attributing their costs in dispute resolution to the other party – currently, some franchisors require franchisees to bear costs, which acts as a disincentive for franchisees to raise any genuine concerns
- Preventing franchisors from requiring franchisees to conduct dispute resolution outside the State where the franchisee's business is located, unless otherwise agreed
- Preventing franchisors from imposing unreasonable restraints of trade on former franchisees, thus promoting competition
- Ensuring franchises owned by the franchisor contribute to the systems marketing and other cooperative funds
Improving conduct in the sector and the overall effectiveness of the Code
The Government proposes to:
- Introduce an obligation to act in good faith into the Code. The codification of good faith for the franchising sector participants may improve conduct in the franchising sector by setting a standard of practice and providing an educative influence. This obligation will apply to all aspects of the franchising agreement.
- Improve compliance and enforcement outcomes through a range of tools for use by the regulator, the Australian Competition and Consumer Commission (ACCC). The Government will introduce penalties of up to $51,000 for serious breaches of the Code.
- Allow the ACCC to use its audit powers to obtain documents that the franchisor has relied upon to support statements and claims made in their disclosure document.
- Prevent franchisors from improperly interfering with prospective franchisee's ability to speak with ex-franchisees.
The Government's 'Future of Franchising' statement on policy reforms:
- Introduces a general duty on franchisors and franchisees to act in good faith during their dealings with each other;
- Enhances the enforcement tools available to the ACCC to deal with serious breaches of the Code by amending the CCA to allow the ACCC to:
- Seek civil penalties of up to $51,000 from the court, and
- Issue infringement notices of up to $8,500 without having to seek a court order
- Improves disclosure and transparency of marketing funds and online sales arrangements
- Provides prospective franchisees with short form, easy to understand information regarding risks and rewards before they become committed
- Clarifies and streamlines the operation of the Code
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.