Franchising in Australia is governed by the Franchising Code of Conduct and there are some proposed amendments to the legislation.

Jane Garber and Ilya Furman, partners at Franchise Legal highlight the amendments to the Franchising Code of Conduct which are likely to come into effect at the start of 2015. 

This is the first time since the introduction of the Code in 1998 that the Government has made a real attempt at addressing many debated areas in franchising previously not clearly (or not at all) dealt with by the Code.

ACTING IN GOOD FAITH

The proposed changes cover a broad range of issues, from introduction of an obligation of parties to act in good faith to the introduction of civil penalties for serious breaches of the Code by franchisors of up to $51,000. The obligation to act in good faith, which has been lobbied for by many players in the franchise industry, will require parties to act honestly and to cooperate to achieve the purpose of the franchise agreement. This obligation cannot be excluded by agreement of the parties and it does not in any way limit the application of good faith obligations under common law.

Under the new-look Code franchisors will be required to provide to all franchisees a short information sheet that contains an overview of the risks and rewards of franchising, the importance of education and conducting due diligence, information on unforeseen capital expenditure and the prospect of franchisor failure. This will be provided before disclosure.

The changes attempt to streamline the information provided to prospective and current franchisees and require an even greater detail of disclosure from franchisors than before. 

OTHER DETAILS

• Electronic signing of disclosure documents by franchisors;
• Electronic provision of information to franchisees with their consent;
• Disclosure of online trading activities of franchisors and any arrangements to profit share;
• Additional disclosure in relation to the expenses of the marketing fund of the franchisor;
• Requirement for franchisors to provide each franchisee with details of any incentive or financial benefit that the franchisor or its associate is entitled to receive as a result of the lease or agreement to lease in relation to the franchisee’s business premises;
• Option for all franchisees to vote regarding the need of an annual audit of the marketing fund’s financial statements;
• Requirement for all franchisors who administer a marketing fund to keep a separate bank account for such a fund;
• Requirement for all businesses (which are the same as the franchises within the same brand) owned by the franchisor to contribute to that franchise system’s marketing and other co-operative funds;
• Requirement for franchisors to remind franchisees that they are entitled to a current disclosure document at the time of renewal.

FRANCHISOR RESTRAINTS

The amended Code also prevents franchisors from:

• Attributing their costs in dispute resolution to franchisees;
• Requiring franchisees to conduct dispute resolution with the franchisor outside the State where the franchisee’s business is located, unless the franchisee agrees;
• Unreasonably imposing restraints of trade on former franchisees if their franchise agreement was not renewed;
• Improperly interfering with prospective franchisees’ ability to speak with ex-franchisees; and
• Imposing significant capital expenditure unless it is properly disclosed in the franchise agreement, such expense is considered necessary by the franchisor and can be justified by a statement which provides the rationale, costs and anticipated benefits associated with making the investment or a majority of franchisees in a system agree to the expenditure.

Lastly, the amendments to the Code remove unnecessary information, such as the duplication of information provided to a sub franchisee by the master franchisee and the franchisor which means that franchisees in multi-tier franchise systems will receive one combined disclosure document rather than separate documents which are largely repetitive in content.

The Code will 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. This means that the franchisors will have a much more stringent requirement to keep records and information in the future.

Below: Jane Garber and Ilya Furman, partners at Franchise Legal