The assistance of Robin King, Solicitor in writing this article is appreciated
Franchising in Australia is a successful $130 billion industry, providing employment for more than 600,000 Australians.
The Franchising Code of Conduct ("Code") is a mandatory code made under the Trade Practices Act 1974 (Cth)) ("TPA"). The Code governs the relationship between franchisors and franchisees, in particular in relation to:
- the disclosure obligations of franchisors to franchisees;
- the conditions of a franchise agreement; and
- resolving disputes between franchisors and franchisees.
Following a recent government review and consultation with industry, amendments have been made to the Code which will impact materially on the conduct of franchises. The changes come into force on 1 March 2008.
Many of the changes made to the Code streamline existing requirements. However, in some cases, they add to the regulatory burden imposed on franchisors and will result in further information considered relevant to the conduct of the franchise being disclosed to franchisees.
Changes To The Code
A brief summary of the amendments to the Code is set out below.
Requirement to include a complete copy of the Franchise Agreement with the Disclosure Document.
This "best practice" will be mandatory.
Requirement to include copies of all associated agreements and contracts with the Disclosure Document.
All documents which are required to be signed by a franchisee must be made available to the franchisee at least 14 days before signing the franchise agreement. Where documents are not available at that time, those documents must be provided when they become available.
Disclosure of Section 87B Undertakings
The Government was of the opinion that timely knowledge of the existence and content of s87B undertakings impacts materially on the ability of franchisees to make informed decisions.
As such, the Code will require that details of any Section 87B TPA undertakings given in connection with the relevant franchise by the franchisor to the Australian Competition and Consumer Commission ("ACCC") should be disclosed to the franchisee not more than 14 days after the undertaking is given.
Rebates and other financial benefits
The obligation on franchisors to disclose whether the franchisor or an associate of the franchisor will receive a rebate or other financial benefit from the supply of goods and services to a franchisee will also require disclosure of the name of the business providing the rebate or financial benefit and whether any rebate or financial benefit is shared, directly or indirectly, with franchisees.
Auditing of marketing and other co operative funds
The Code will require mandatory preparation of financial statements for marketing and other co-operative funds by franchisors. Each franchisee is to be provided with a full account of the funds together with auditors' reports.
Information about past Franchises
Franchisors will be obliged to provide details of names, location and contact details (where the franchisee's consent has not been withheld and where that information is available to the franchisor) of past franchisees.
Short form disclosure
The opt-out provision for short form disclosure in Part 2 clause 6C of the Code has been removed. The Government was of the view that all disclosure information in Annexure 1 of the Code is of potential importance to franchisees and should be provided, if requested.
Disclosure of materially relevant facts
The Code will require that all materially relevant facts should be communicated to franchisees within 14 days from the date the franchisor becomes aware of the facts. This requirement seeks to ensure that franchisees are provided with timely disclosure of information which is materially relevant to the operation of their franchise.
Removal of "one franchise" exemption
The Code will no longer provide exemption for franchisors not resident, domiciled or incorporated in Australia with one franchise only in Australia. The Government was of the view that the Code should apply uniformly to all franchise systems operating in Australia.
Directors of Franchisor to disclose details of proceedings and convictions
The Code will require details of proceedings involving directors of the franchisor, as well as criminal convictions for non serious offences committed by directors of the franchisor, to be disclosed to franchisees.
The right of unilateral change or termination of a Franchise Agreement
Section 51AC of the TPA, which deals with unconscionable conduct in business transactions, was amended in September 2007 to reflect that a right to unilaterally vary a contract is now a factor that a court may consider in determining unconscionable conduct.
The obligation on franchisors to include financial reports for the last two financial years with the disclosure document will be extended to include financial reports for any consolidated entity to which the franchisor belongs.
Standardisation of the audit period
The audit period referred to in Part 2 clause 6(1) of the Code has been changed to align with the audit period stipulated in the Corporations Act 2001 (Cth). A franchisor must now create a disclosure document within 4 months after the end of each financial year.
Details and history of the territory or site to be franchised
It will be mandatory that this information be contained in a separate document to be provided with the disclosure document.
Copy of the Code to be attached to the disclosure document
A copy of the Code must be attached to the disclosure document.
Disclosure document to be given to Franchisees upon extension of the scope or term of a Franchise Agreement
A current disclosure document must be provided whenever there is an extension of either the scope or term of a Franchise Agreement.
In addition, a number of other technical or minor amendments will be made to the Code.
From 1 March 2008, the changes will cause the Code to have broader application to cover most franchises, including certain franchises that were not covered prior to 1 March 2008. For franchises existing prior to 1 March 2008, the changes will need to be reviewed closely to ensure continued compliance with the Code in respect of the additional obligations from 1 March 2008.
However, as no change has been recommended to the scope of a "franchise agreement" to which the Code will apply, many organisations involved in the promotion, supply and sale of branded products will continue to fall outside the scope of the Code. Of course, care will still need to be taken to ensure that trade marks licences, distributorships, multi-level marketing organisations and commissioned agency agreements do not fall within the scope 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.