Franchisees of all franchise systems must ensure they properly understand not only their franchise agreement but also the Franchising Code of Conduct.

This regulatory Code aims to deliver benefits for franchisees and prospective franchisees. However these benefits can only be realised and enjoyed by franchisees once they have a good understanding of the substance of the Code and the impact it can have on the actions of both franchisor and franchisee.

Some of the key clauses that franchise buyers need to be aware of are discussed below.

Penalties for non-compliance with the Code

Monetary penalties can be ordered by the Court for non-compliance with various provisions of the Code.  Since their introduction with the new Code, the penalties have already been raised to $54,000 for a single offence.

Franchisees must keep this in mind as it compels the franchisor’s strict compliance with all aspects of the Code.

Good faith

Prospective and existing franchisees and franchisors are all obliged to act in good faith in relation to the franchise agreement or proposed franchise agreement and the Code.

Any clauses in a franchise agreement which attempt to limit or exclude the obligation to act in good faith will have no effect.

Significant capital expenditure

Under the Code, franchisors cannot demand franchisees undertake significant capital expenditure during the term of their franchise agreement, unless the expenditure is:

• disclosed before the start of the franchise agreement;
• incurred by all or a majority of franchisees and approved by a majority of franchisees;
• incurred by the franchisee to comply with legal obligations (not those imposed by the franchise agreement);
• agreed by the franchisee; or
• regarded by the franchisor as being necessary as capital investment in the franchised business and justified by a statement of the rationale for the investment, the amount required, the anticipated outcomes and benefits and the expected risks.

This ensures franchisors are accountable when requiring franchisees to commit to capital expenditure. Franchisees need to be aware of any significant capital expenditure that is disclosed before signing the franchise agreement.

Marketing funds

The Code requires franchisors to maintain a separate bank account for marketing and advertising fees contributed by franchisees. These fees can only be used to meet expenses that are:

• disclosed in the disclosure document; or
• legitimate marketing or advertising expenses; or
• agreed to by a majority of franchisees; or
• used to pay the reasonable costs of administering and auditing a marketing fund.

Franchisees can vote not to audit the marketing fund however such a vote is only effective for that financial year.

As marketing funds represent both a significant cost as well as a valuable opportunity, new franchisees should ensure they have a proper understanding of how the fund will operate. Before signing the agreement franchisees should obtain copies of the audited marketing fund financial statements (if available, otherwise unaudited) to understand how the marketing fund is used.

Dispute resolution

A clause in a franchise agreement which requires proceedings to be brought in any State or Territory other than the one in which the franchised business is located is unenforceable.

Nor can franchise agreements contain an obligation for the franchisee to pay the costs of the franchisor in relation to settling a dispute under the franchise agreement.

Restraints of trade and non-renewal of franchise agreement

Restraint clauses can be ineffective in certain circumstances. If a franchisee seeks to renew the franchise agreement on substantially the same terms and is not in breach of their obligations, yet the franchisor does not renew the franchise agreement, any restraint of trade clause in the franchise agreement could prove invalid.

This would be the case if, after the end of the franchise agreement, either:

1. nominal compensation is given to the franchisee which does not adequately compensate the franchisee for non-renewal; or
2. the agreement does not allow the franchisee to claim compensation for non-renewal.

Franchisees need to plan early for life after the franchise. It is important to understand the restraints as drafted in the franchise agreement, as well as understand the circumstances in which those restraints will have no effect.

Entitlement to disclosure document

Franchisors are required to provide a copy of the franchisor’s current disclosure document within 14 days of a request by a franchisee, though a request can only be made once every 12 months.

This ensures that franchisees can obtain up to date information from the franchisor.

Conclusion

A sound understanding of the Code is highly beneficial to franchisees in many ways. The ability for the ACCC and courts to impose monetary penalties will give the new Code serious clout and new force which should ensure the benefits to franchisees are able to be realised.

However, these benefits do not remove the need for franchisees and prospective franchisees to undertake the task of reading all relevant agreements and conducting their own research.  It is also still imperative that franchisees seek advice from lawyers, accountants and business advisors who are experienced in franchising.