A new Franchising Code of Conduct came into effect on 1 January 2015. The Code requires franchisors to create a disclosure document in a new format and may also require franchisors to make amendments to their template franchise agreement.

The key clauses of the franchise agreement that need to be considered are those dealing with the jurisdiction for, and costs of, settling disputes; restraints clauses; clauses dealing with the transfer or sale of the franchise; and marketing funds.

A provision in the Code allows franchisors a grace period for updating their disclosure document to the new format. For franchisors whose financial year ends 30 June 2015 this grace period ends on 31 October 2015.

Unfortunately, the grace period does not extend to the franchise agreement so franchisors should have already amended their franchise agreements to comply with the Code. If you have not done so it is not too late but, your lawyer should immediately review your franchise agreement and any amendments required should be made as soon as possible.

This year to comply with the Code franchisors will need to:

1. review and amend their template franchise agreement;
2. convert the disclosure document to the new format and complete the document’s standard annual update by 31 October 2015.

What you can do to update the disclosure document

Because many of the changes required for the purposes of the annual update of the disclosure document are factual, you can do a lot of the disclosure document updates yourself, although we do recommend that your lawyer check the changes made against the Code requirements.

Among the changes you can make yourself are the following:

• details of any litigation (Item 4)
• details of the number of existing franchisees and franchised businesses (Items 6.1 to 6.3)
• details of the key events (e.g. franchises transferred, franchised businesses that ceased operating and franchise agreements terminated by the franchisor) for each of the last three completed financial years (2013, 2014 and 2015) (Item 6.4)
• you must also disclose contact details for franchisees involved in any of the above key events, unless they have specifically asked that their details remain undisclosed
• details of any unilateral variations made to existing franchise agreements in the last three financial years (Item 17A)
• details of whether, in the last three financial years, you have considered any significant capital expenditure undertaken by franchisees in deciding what arrangements will apply at the end of a franchise agreement (Item 18.2)
• any changes to your intellectual property (Item 8)
• marketing fund expenditure for the 2015 financial year (Item 15)
• payments (Item 14), including payments to third parties (Item 14)

What your lawyer can do

Your lawyer can assist you update your disclosure document, and help review your internal processes and your franchise agreement in light of the changes to the Code.

The following sections of the disclosure document involve legal rather than factual updates, so we recommend these sections be updated in consultation with your lawyer:

• Items 9 and 13 (franchise sites or territories)
• Item 10 (supply of goods and services to franchisees)
• Item 11 (franchisee’s supply of goods or services)
• Item 12 (supply of goods or services – online sales)
• Item 16 (finance)
• Item 18 (arrangements to apply at the end of the franchise agreement)

There are additional disclosure items franchisors will need to consider in updating their disclosure documents, and these include:

• a new Item 7 to be completed where the franchisor is a sub-franchisor or master franchisee
• a new Item 12 requiring disclosure of arrangements relating to sales of goods and services online by the franchisor or its associate, the franchisee or other franchisees
• mandatory statements are now required to make it clear what will happen at the end of the term of a franchise agreement when there is an option to renew and when there is no option to renew or extend the franchise agreement.

No false impressions

Franchisors should treat the formal requirement in the Code that franchisors update their disclosure document annually within four months of the end of their financial year as an absolute minimum requirement.

Before a disclosure document is handed out to a prospective franchisee, franchisors should ensure it is up to date and does not give a franchisee a false impression about the franchisor or the system.

Consequences of non-compliance

The ACCC has been given greater audit and investigative powers and can now issue infringement notices carrying fines of up to $8,500. There are now pecuniary penalties of up to $51,000 that can also be ordered by the Federal Court for non-compliance with the Code.

Penalties can be issued when the franchisor fails to:

1. create a compliant disclosure document (clause 8(1));
2. update a disclosure document within four months after the end of each financial year (clause 8(6));
3. give each prospective franchisee a copy of the Code, the disclosure document and the franchise agreement at least 14 days before he or she enters into a franchise agreement or makes a non-refundable payment in connection with the proposed franchise agreement (clause 9(1));
4. provide an existing franchisee with a copy of the Code, the disclosure document and the franchise agreement at least 14 days before renewal or extension of the franchise agreement (clause 9(2)).

With the introduction of penalties and infringement notices under the Code it is more important than ever before franchisors ensure that their documents and processes comply with the Code.