The long anticipated amendments to the Franchising Code of Conduct as a result of the Opportunity not Opportunism and the Expert Panel reports were finally released by the government on Friday 4 June.
The regulatory changes do not contain any surprises. Small Business Minister Emerson announced the Government’s legislative intentions in March and the amendments are consistent with this announcement. They are primarily changes albeit quite significant changes- to the Disclosure Document. What is surprising is the indecent haste in the amendments becoming operative. The changes take effect on 1 July.
Given the very long gestation period of the current Code review around the very short time allowed for franchisors to review and amend their Disclosure Documents is particularly disappointing. The Opportunism report was tabled in December 2008 and the Government’s response was tabled 11 months later. The Expert Panel’s report was released, contemporaneously with notification of the Government’s acceptance of it and its general legislative intentions on 3 March this year. The amendments were released on Friday 4 June to take effect on 1 July 2010. This is an unreasonably short period for franchisors and their legal advisors to implement the changes.
For franchisors intending to sign up franchisees early in July the timing constraints are in fact much more challenging. Although the amendments take effect from 1 July 2010 the Code of course requires that a Disclosure Document be provided at least 14 days before the contract is entered into. Presumably that Disclosure Document must comply with the post 1 July requirements even though it was provided before 1 July. There is an argument that franchisors have a grace period of 4 months to prepare compliant Disclosure Documents as currently provided in the Code. This interpretation would avoid the need to draft two Disclosure Documents in quick succession and would avoid the problem that a Disclosure Document prepared in July cannot practicably comply with Item 20 of the Disclosure Document which requires the financial details for the last 12 months. This information will not be available until some months into the new financial year which of course was the reason for the 4 months grace period being prescribed.
The drafting is poor. The transition to the new disclosure regime should have been addressed.
The 1 July amendments are primarily in relation to the disclosure regime with the major additional disclosures relating to:
- a warning that the franchisor or the franchise could fail with adverse consequences for the franchisee
- unforeseen significant capital expenditure
- dispute resolution costs unilateral variation
- end-of-term arrangements
In addition to the changes in the disclosure regime there are a range of substantive amendments to the Code itself all of which have been foreshadowed:
- pre-expiry notices under which a franchisor must notify a franchisee of its decision to renew or not renew the agreement at least six months prior to the expiry of the agreement
- novation to be treated in the same manner as transfer
- disclosure document to be provided before a franchisee is granted an extension in the scope of the agreement
- changes to the agreement when a franchisee is trying to transfer or novate the agreement
- provisions aimed at ensuring that parties approach disputes in a reconciliatory manner.
The Minister’s media release states that the amendments are aimed at placing franchisees in a better position to understand the risks of going into franchising by getting clearer information up front about the terms and conditions on offer. The amendments undoubtedly enhance the prior disclosure regime but also make significant substantive changes beyond disclosure.
The DCS Legal team will be in contact with its clients to discuss the practical consequences of these changes.