Amie Larter (00:30):

Hello and welcome. My name is Amie Larter and this is the Buying a Franchise podcast. It’s vital to listening for anyone interested in buying or that’s in the process of buying a franchise. As usual, I am joined by Sarah Stowe, editor of Inside Franchise Business, Australia’s leading franchise hub to help guide us through everything we need to know about the franchise buyer’s journey. Today we’re going to uncover what you need to know about the Franchising Code of Conduct. Sarah, welcome. Now I have to admit, this doesn’t sound like the sexiest topic we could be discussing, so I guess it must be very important for us to be chatting about it.

Sarah Stowe (01:06):

Hi, it’s good to be here. Ah, yes. You’re so right. Talk of codes does sound rather heavy, doesn’t it? I’d love to be able to cover off on this really quickly, but it is something that’s important and franchise buyers aren’t generally familiar with it, so I think there is value in giving in and highlighting why it’s relevant. So let’s stick with it.

Amie Larter (01:23):

Okay, I agree. Sometimes the most important things require little effort to get into grips with, so let’s get into it. Can you start by telling us what exactly is this code?

Sarah Stowe (01:34):

The Franchising Code of Conduct covers the business interactions between franchisees and franchisors. If I can give you a bit of background, there’s a natural power imbalance between franchisors and franchisees with franchisors who own the brand and the business systems holding that balance of power. So the code was introduced to address problems that could arise from this. It isn’t new, but over the years it has been updated and revised to reflect changing expectations.

We’re going to get a bit heavy here, but I’ll be quick. It’s important to note that this is a mandatory industry code which sits under the Competition and Consumer Act 2010, and that means it’s regulated by the Australian Competition and Consumer Commission. While this might seem much too much detail, I’m explaining it because the code is part of a bigger regulation and it is mandatory, so its rules and regulations have to be complied with.

Amie Larter (02:25):

So who exactly has to comply? Sarah, is this something that the franchisors who own the overall business have to worry about?

Sarah Stowe (02:32):

Yes, absolutely. Franchisors do need to adhere to the standards and processes set out in the Franchising Code of Conduct. But so too, do the individual franchisees in almost every franchise operation in Australia; there are a handful of exceptions, such as if the business is governed by another industry code.

The Franchising Code of Conduct – gosh, it’s a bit long winded, isn’t it? Let’s call it the code – is a legally binding set of rules that apply even if the brand is an overseas business. If it is operating in Australia, those franchisors and franchisees have to comply.

Amie Larter (03:05):

Okay, so we know we need to follow the rules, Sarah, but what exactly is in the code?

Sarah Stowe (03:10):

Essentially it’s a set of rules that govern the, that govern the important interactions between franchisors and franchisees. So the overarching element is about both sides acting in good faith, but there are other more specific areas. The Code provides regulations for disclosure, franchise agreements, termination and dispute resolution.

Amie Larter (03:31):

Okay, so let’s look at each of these in turn so we can be sure we’ve understood what’s involved in each section. Sarah, tell us more about good faith.

Sarah Stowe (03:40):

Well, good faith is about standards of behaviour. Um, what does this mean? What it means is both the franchisor and the franchisee are required to act in good faith by adopting an honest, fair, and cooperative approach to their dealings with each other and in business in general.

Now, it would probably be helpful if the code defined exactly what good faith means, but it doesn’t, so it’s open to interpretation. However, the concept is encapsulated in what’s called common law and under common law good faith means any parties to an agreement have to act recently and cannot be arbitrary in their behaviour.

Amie Larter (04:14):

Do you have any examples you could share that would explain a little more clearly?

Sarah Stowe (04:18):

Yeah, well, if a franchisor, for instance, is dishonest or undermines the franchisee’s legitimate interest = that’s a failure to act in good faith. For instance, if a franchisor continued to sell franchisees when it knew it would soon close down the franchise side of the business.

Of course it works both ways. So if the franchisee chooses to be dishonest, um, in dealing with the franchisor that also is regarded a failure of good faith. Now it extends to all elements of the franchising relationship and it, it starts before any documents are signed, when the franchise buyer and the franchisor are in negotiations and the rules of good faith apply to the franchise agreement, to dispute resolution and to exiting the business.

Amie Larter (04:58):

Okay, so just pin it down a little more. What happens if as a franchisee, I want the franchisor to change something in the franchise agreement because it doesn’t work for me?

Sarah Stowe (05:08):

That’s a good question. Um, the principle of good faith doesn’t prevent either party from making decisions that are commercially favourable to them. So a franchisor is not required to make any changes to a franchise agreement simply because the franchisee requests this. This is not seen as a failure of good faith. They could however, um, go ahead and make those changes. Another point worth mentioning is that good faith overrides any clause in another document that might try to limit it.

Amie Larter (05:35):

So you’ve mentioned here about failure to act in good faith. What actually happens if this is called out?

Sarah Stowe (05:42):

That’s a good point, Amie. Um, because the Code of Conduct is legally binding and it’s part of the Competition Consumer Act, the ACCC can investigate any alleged breaches and can even take action, legal action if necessary to seek financial penalties. Of course, that applies to breaches of other of the other elements too, not just good faith. It could equally be applied to a franchisor or franchisee breaking their franchise agreement.

Amie Larter (06:06):

What about the franchise agreement, Sarah, what does the code say about this?

Sarah Stowe (06:11):

The franchise agreement is the contract between the franchise or and franchisee and the code outlines what needs to be included in terms of concepts and it does contain some specific rules according to the code.

The franchise agreement should provide clear details of a franchisee’s rights, responsibilities and obligations and also the obligations of the franchisor. However, what it doesn’t do is prescribe the exact content. So franchises are free to shape their agreements within these guidelines, and every franchise agreement will be different.

What the code does allow for is a 14 day cooling off period. So after signing a franchise agreement a franchisee can decide to back out of the contract and get all, or some of their money back – there may be administrative costs to pay within this timeframe.

Amie Larter (07:00):

Uh, I believe we’ve got a whole podcast on what franchise buyers should look for in a franchise agreement, so that’s definitely worth a listen. So back to the code, you mentioned disclosure. So what’s the role of the code there?

Sarah Stowe (07:13):

Well, the franchisor has to give any prospective franchisee certain documents before they sign a franchise agreement and during the term of the agreement. One of the documents is a disclosure document and this will include specific details about the franchise system. The behind-the-scenes look, if you like, at the operations and it’s designed to give a potential franchisee plenty of information they can base their buying decisions on.

The code outlines what has to be included in the disclosure document, and there is a long list, so I won’t go into the details.

Amie Larter (07:44):

But you have previously Sarah, um, in another podcast, so we can link to that in the show notes. It’s definitely worth a listen. So what about disputes? This is obviously an issue in some businesses, so how does the code affect this?

Sarah Stowe (07:58):

Well, they, of course, disputes do occur, but fortunately they often don’t reach the stage of needing arbitration or mediation. However, uh, the code does insist that franchisors have an internal dispute resolution process. So that involves the franchise or franchisee writing to the other, outlining what the dispute is about, what resolution they would like and what steps are necessary for it for the issue to be settled. Then if necessary, um, there’s a further step to go to arbitration, mediation or conciliation, and this would normally take place with an independent arbitrator.

So while franchisees and franchisors can of course resort to legal action it is an expensive option and the point of the code, um, is that the processes it sets out are designed to avoid this if possible.

Amie Larter (08:44):

Okay. So we’ve dealt, we’ve dealt with good faith, the franchise agreement, dispute resolution. What else was there?

Sarah Stowe (08:52):

Uh, well the code also shapes the processes around leaving a franchise business. So in in particular, um, franchisees who want to leave their franchise early will need to adhere to the set process, um, outlined in the code and in a case where a franchisee has breached the agreement, the franchise must give usually not less than 30 days written notice of the breach and set out what the franchisee needs to do to rectify that breach. Then if the franchisee fails to fix the problem, the franchiser may terminate the agreement.

Again, the specifics of the breach are not outlined by the code. This is just the process. So as you can see, Amie, the code serves to provide a framework for both franchisees or franchisees to work with before they set up the agreement, during the agreement and at the end of the franchise term.

Amie Larter (09:41):

Right. So if we go back to earlier in the podcast at the start of our discussion, Sarah, you did mention that the code has been updated regularly or over time. You can tell me how regularly. Is there anything new that franchise buyers need to know about?

Sarah Stowe (09:56):

It has been regulated, um, it has been updated over time and obviously the most recent version is what’s relevant to new franchise buyers, uh, and current franchisees. Um, so each revision has provided more information and protection for franchisees. The newest development is, um, the launch of a national franchise register, um, which was activated last year. So the idea is that if you’re looking to buy a franchise, you can search the register and view franchisor profiles and disclosure information online.

Amie Larter (10:27):

Excellent. Well, Sarah, it’s been really useful to get some insights into the Franchising Code of Conduct. It can seem quite daunting, so it’s good to drill down a little into what it’s all about. Do you have any kind of top line key takeaways for us?

Sarah Stowe (10:41):

I think there’s a couple of points I’d highlight. I think it’s crucial for a potential franchisee to appreciate that the code is legally binding and that there can be financial consequences for them for breaching it. Uh, it doesn’t matter whether you are franchisor or franchisee and that’s why it’s useful to have a specialist franchising lawyer look at the documents a franchisor gives out just to ensure that everything is in fact code compliant. Because while the code has an impact on both parties, it has been designed to deliver protections to franchisees.

Amie Larter (11:13):

Great points to finish on Sarah, and thank you. We did mention a couple of other podcasts which crossover with the code, the franchise agreement and the disclosure document. So if you haven’t checked these out yet, have a listen. Uh, they’re jam-packed with really useful information and as usual in the show notes, although we’ve got links and references if you want to follow this further and get more in-depth information before you continue your journey to buying a franchise. Thank you for listening.