From 1 January 2015, a new Franchising Code of Conduct (the Code) will take effect, replacing the 1998 code. The Code follows on from the Wein Review and is designed to promote industry growth, reduce red tape, and ensure best practice.
This update focuses on the key enforcement and dispute issues franchisors and franchisees should be aware of, including the obligation to act in good faith and a push toward alternative methods of dispute resolution.
It remains to be seen how the new Code will be enforced by the ACCC and applied by the courts. However, in light of these changes, franchisors and franchisees should ensure their conduct is open, candid, and reasonable in the context of competing commercial interests.
Understanding the Code
The key changes introduced by the Code will:
- impart on franchisors and franchisees a duty to act in good faith towards each other
- provide strict financial penalties for certain breaches of the Code, including through court-ordered pecuniary penalties
- promote greater transparency around the use of marketing funds, and
- compel greater disclosure about sale of goods online.
ACCC enforcement priorities
Non-compliance with the Code will amount to a breach of the Competition and Consumer Act 2010 (Cth) and will expose franchisors and franchisees to enforcement action by the ACCC. The ACCC has stated that its enforcement priorities will include:
- a failure to act in good faith
- a failure to provide a disclosure document
- a refusal to attend mediation, and
- the unlawful termination of a franchise agreement.
However, as always, the ACCC will be monitoring the industry to identify matters of significant legal or public interest concern, unconscionable conduct, and "particularly egregious conduct" by franchisors.
The Code implements 20 new civil penalty provisions, mostly dealing with disclosure of information and documents before and during a franchise agreement. Failure to comply with the Code may lead to court proceedings and expose parties to penalties of up to $51,000 for each breach, as well as compensation and damages, injunctions, and disqualification orders. The ACCC may also issue infringement notices of $8,500 for corporations and $1,700 for individuals or unincorporated entities for reasonably suspected breaches of the Code.
The Code explicitly requires parties to act in good faith in their dealings with one another in connection with franchise agreements. This obligation extends beyond the confines of the actual agreement to include pre-contractual negotiations, termination and dispute resolution. Parties may be required to act in good faith even after a franchise agreement has come to an end.
The concept of "good faith" has not been defined in the Code and the scope of the obligation to act in good faith has been left to be interpreted in accordance with the general law and the decisions of the courts. Although the obligation to act in good faith does not require parties to act against their own legitimate commercial interests, the ACCC's guidance suggests that the duty of good faith will require franchisors and franchisees "to act reasonably and not exercise your powers arbitrarily or for some irrelevant purpose". In determining whether a party has failed to act in good faith, the courts may consider the honesty of the party's conduct, whether that party acted arbitrarily and the degree of cooperation between the parties in furthering the agreement.
It is yet to be seen how the law on good faith will develop in response to the Code, or how proactive the ACCC will be in pursuing complaints of bad faith. With this in mind, franchisors and franchisees should:
- be aware of their obligations and cautious in their dealings with one another
- put in place appropriate internal controls to minimise risk, and
- seek advice before taking any measures which may lead to a complaint being made.
Pre-contract and ongoing disclosure
Franchisors are required to provide a disclosure document to a franchisee at least 14 days before they enter into, renew or extend a franchise agreement. The Code prescribes the content and form of the disclosure document. The Code also imposes disclosure obligations throughout the term of the agreement. The Code exposes franchisors to the risk of civil penalties for failure to create, update and provide a Code compliant disclosure document.
Complaints and dispute resolution
The Code sets out a complaint handling procedure that the parties to a franchise agreement may use and with which any internal complaint handling procedure of the franchisor must comply. Consistent with good commercial practice, the Code requires that the parties first attempt to negotiate a resolution and then, if unresolved, refer the dispute to mediation. The parties are obliged to attend the mediation and a party that refuses is at risk of a civil penalty.
The ACCC has indicated that where a complaint has been made, it is likely to consider whether the parties have attempted to resolve the matter themselves and have referred the matter to mediation.
The Code also deals with termination of franchisee agreements. For example, the Code imposes an obligation on the franchisor to give reasonable written notice of intention to terminate the franchise agreement on breach by the franchisee and to allow the franchisee a reasonable time to remedy the breach. Franchisors in particular should be mindful of the termination provisions to avoid being exposed to a dispute with a franchisee or ACCC enforcement action for unlawful termination of a franchise agreement.
The ACCC has broad investigatory and enforcement powers under the Competition and Consumer Act, which it may use in connection with suspected breaches of the Code (See our earlier update " ACCC priorities for 2014 announced". For example, where the Code is breached, the ACCC has the power to require provision of information and documents, to issue substantiation notices, and to commence court proceedings seeking orders for injunctions and for payment of compensation, damages and civil penalties.
Franchisors in particular, including their directors, company secretary and other officers and employees, should be aware of their potential liability for breaches of the Code and take steps to ensure appropriate internal compliance measures are in place and seek expert advice where necessary.
How the new Code will be enforced by the ACCC and applied by the courts remains to be seen. However, in light of the obligation to act in good faith and the push towards alternate dispute resolution to avoid disputes or enforcement by the ACCC franchisors and franchisees should ensure their conduct is open, candid, and reasonable in the context of competing commercial interests.
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.