On 1 January 2015, the existing Franchising Code of Conduct was repealed with the Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (new Franchising Code of Conduct) being implemented. The new Franchising Code of Conduct will govern Franchisors’ conduct and obligations from 1 January 2015 onwards.
The new Code will apply to existing Franchise Agreements that were entered into, on, or after 1 October 1998 that are renewed, varied or transferred on or after 1 January 2015.
Franchising Code of Conduct
The Franchising Code of Conduct is a mandatory legislative instrument that governs the relationship between Franchisees and Franchisors, and provides for information that must be disclosed to Franchisees when entering into a Franchise Agreement.
The amendments have been introduced with the view of providing greater transparency to Franchisees in relation to the financial and legal risks and expectations of entering into a Franchise.
The following requirements will be implemented as part of the new Franchising Code of Conduct:
- Parties to the Franchising Agreement are required to expressly act in good faith in their dealings with each other;
- financial penalties of up to $51,000 have been introduced, and can be levied against Franchisors for major breaches of the Franchising Code of Conduct;
- infringement notices for minor breaches of the Franchising Code of Conduct have been introduced;
- franchisors are required to provide a short information statement to prospective Franchisees which outlines the risks and benefits of a Franchising relationship;
- franchisors must provide greater transparency in their accounting of marketing and advertising promotion funds;
- franchisors must establish a separate account for utilising marketing and advertising contributions provided by Franchisees;
- for multi-tiered systems, Master Franchisors are only required to provide Disclosure to prospective Franchisees;
- franchisors must provide disclosure on the ability of the Franchisee to sell and trade online; and
- franchisors will be restricted from requiring Franchisees to provide significant capital expenditure, except in certain limited circumstances.
The new requirements and obligations that have been implemented are extensive, and it is important for Franchisees and Franchisors to understand their new rights and responsibilities.
All franchisors should review and understand the new Franchising Code of Conduct to ensure that the new requirements and mandatory disclosure obligations are complied with.
The most significant changes are the imposition of financial penalties of up to $51,000 for incidences of major breaches of the provisions of the Franchising Code of Conduct.
Where the following areas are breached by Franchisors, penalties may be enforced and will be levied by way of a penalty unit system dependant on the seriousness of the breach:
- Failing to act on good faith;
- failing to provide a Disclosure Document or maintain a Disclosure Document in the form prescribed;
- failing to provide a copy of a Lease or other agreements required by the Code;
- failing to provide financial statements;
- failing to disclose materially relevant facts;
- failing to indicate the Franchisor’s intention to renew a Franchisee within the required timeframes and failing to provide a Disclosure Documents when providing notice;
- failing to repay monies to Franchisees who have terminated within the cooling off period;
- failing to disclose details of former franchisees or failing to remove a franchisee from the list of former franchisees;
- restricting or deterring franchisees from freedom of association; and
- failing to attend mediation.
Deed of Variation
The Australian Competition and Consumer Commission (ACCC) have drafted a Deed of Variation that can be executed by the parties to existing Franchising Agreements agreeing to be bound by the provisions of the new Franchising Code of Conduct.
It is necessary to carefully review your Franchise Documents prior to considering whether to enter into the Deed of Variation, as updated Disclosure Statements may need to be provided to Franchisees.
How We Can Help
It is strongly recommended that
- franchisors have their existing Franchise Agreements and Disclosure Documents reviewed to ensure that they are compliant with the new Franchising Code of Conduct; and
- prospective franchise purchasers obtain independent legal advice on the financial and legal obligations of the Franchise so that they properly understand the relationship being entered into with the Franchisor.
If you require assistance with any of the above matters, or a different area of commercial law, do not hesitate to contact our office.
Craig Mason – Solicitor