The Australian Competition and Consumer Commission (ACCC) regulate the relationship between franchisors and franchisees through a mandatory code authorised under section 51AE of the Competition and Consumer Act 2010 (Cth).
Application of the code
The new Franchise Code of Conduct 2014 (Code) applies to conduct occurring from 1 January 2015 and applies to franchise agreements entered into, renewed or transferred on or after 1 October 1998 (clause 3(1) of the Code). The Code also does not apply to the discharge of existing obligations under the old franchising code.
Some provisions of the Code will not apply to existing contracts entered into or renewed before 1 January 2015 under clause 4 of the Code.
Franchisors may still use their ‘existing disclosure document’ or a disclosure document that exists on 1 January 2015 up until the 31 October 2015 (preamble item 8 of the Code).
However, beginning 1 January 2015 Franchisors must:
- act in good faith;
- disclose any material facts to ensure they do not engage in misleading and deceptive conduct;
- comply with the provisions relating to their marketing fund;
- retain documents provided by prospective/existing franchisees that corroborate any claim in the disclosure document;
- provide prospective franchisees with an information statement; and
- not request significant capital expenditure contrary to the new provisions of the Code.
Changes to the Code
The most significant changes to the Code include:
- amendments to the Franchisor’s disclosure requirements;
- the introduction of an obligation of good faith;
- provisions regarding marketing and advertisement fees;
- restrictions on the enforceability of restraint of trade;
- amendments to the penalties and infringement notices; and
- restrictions on Franchisor’s requesting significant capital expenditure.
- Information statement
Under the new Code Franchisors must provide a party who proposes to enter into a franchise agreement with an information statement set out in Annexure 2 of the Code (clause 11 Division 3 of the Code).
The information statement must be:
- in size 11 font;
- contain no more than two (2) pages; and
- be provided to a prospective franchisee as soon as practicable after they formally express interest in the acquisition of a franchised business (clause 11 Division 3 of the Code).
- Disclosure document
The information statement must be provided in addition to a full disclosure document to the franchisee (Division 2 Clause 8 of the Code).
Under clause 8(3)(a) of the Code the disclosure document must be set out:
- in the form and order of Annexure 1;
- use the headings and numbering of Annexure 1; and
- if required include any additional information under the heading “Updates”.
The timeline for providing the disclosure document has not changed, pursuant to clause 9 of the Code:
- a copy of the Code, the franchise agreement and disclosure document must be sent to a party at least fourteen (14) days before the party enters into the franchise agreement or pays a non-refundable money to you or an associate in connection with the franchise agreement; and
- provide the franchisee with one (1) week cooling off (clause 26 of the Code).
The new code disposes of the short form disclosure document with a long form disclosure document now applicable. Under clause 11 of the Code the Franchisor has the additional obligation of disclosing details regarding the:
- franchisee’s ability to make online sales and required specifications; and
- details of associates of the Franchisor (including those that are involved in marketing and selling the franchise system).
A Franchisor is not required to update their disclosure document if they have entered into a maximum of one (1) franchise agreement in the last financial year and do not intend to enter in another agreement in the following year (clause 8(7) of the Code)
Master Franchisors are generally not required to supply disclosure documents to sub-franchisees (Division 1 clause 12 of the Code).
After entering into a franchise agreement, the Franchisor must update their disclosure document within four (4) months after the end of each financial year (clause 8(7) of the Code).
The Code imposes a new obligation of good faith in all transactions relating to the Code and a franchise agreement. Under the Code the term “Good faith” derives its meaning from the common law (Division 3 clause 6(1) of the Code). It requires that two (2) parties act honestly and cooperatively in order to achieve the purpose of the franchise agreement.
Importantly, the duty of good faith applies to any matter arising under the franchise agreement and in the Code (Division 3 clause 6 of the Code). The duty therefore applies to Franchisors, franchisees and prospective franchisees. It also extends to pre-contractual negotiations, disputes and even after the termination of a franchise agreement.
The ACCC has advised that the duty of good faith does not necessarily require the Franchisor or franchisee to abandon their commercial interests. To avoid breaching the duty, the ACCC recommends, at all times, parties:
- act honestly;
- make timely decisions;
- consider the other party’s interests;
- consult with other parties about proposed changes; and
- proactively attempt to resolve disputes.
Marketing and advertisement fees
Funds may only be used for marketing or advertising if the amount is provided for in the disclosure document, it is a legitimate marketing or advertising expenses or use of the funds has been agreed to by a majority of the franchisees (clause 31(b) of the Code).
The new Code requires the Franchisor to maintain a separate bank account for marketing and advertising fund money (clause 31(1) of the Code). Any fees for the administration or auditing of the marketing fund must be paid for from the fund itself (clause 15(3) of the Code).
The Franchisor must contribute to the marketing fund on behalf of each unit on the same basis as each franchisee (clause 31(2) of the Code). The fund needs to be audited every year, rather than every three (3) years as detailed under the old code (clause 15 of the Code).
However, if seventy-five (75%) of franchisees elect not to audit the marketing fund then the Franchisor is able to waive that right for that particular year (clause 15(2) of the Code). However, each franchisee will need to vote every year in relation to whether they would like to waive the audit.
Significant capital expenditure
Under Division 6 clause 30 of the Code a Franchisor cannot ask a franchisee to contribute to any significant capital expenditure unless one (1) or more of the following applies:
- the disclosure document specifically requests the contribution before entering into or renewing a franchise agreement;
- the franchisee agrees to the request from the Franchisor;
- the expenditure is incurred by all or a majority of franchisees and a majority of the franchisees agree to the significant capital expenditure;
- the capital expenditure is necessary to comply with the Franchisor’s legislative obligations; or
- the Franchisor has a necessary reason justified by a written statement which outlines the rationale, cost, outcomes, risks and benefits of the significant capital expenditure.
Restraint of trade
Clause 23 of the Code states that an otherwise valid restraint of trade clause will not be enforceable after expiration of the franchise agreement if the franchisee:
- seeks to extend the franchise agreement but the Franchisor declines;
- is not in breach of the franchise agreement;
- has not infringed the Franchisor’s intellectual property or breached any obligation of confidentiality under the franchise agreement; and
- does not receive genuine compensation for goodwill or the franchise agreement did not allow the Franchisee to claim goodwill if the franchise agreement was not extended.
If all of these requirements are met then the franchisee is able to continue trading in the same business or industry, albeit not under the same brand name as the Franchisor and without breaching the Franchisor’s intellectual property.
Penalties and infringement notices
The Code allows for fines and civil pecuniary penalties for breaches of the Code including the obligation of good faith.
The Franchisor must have a dispute resolution procedure that complies with Part 4 Division 1-2 of the Code. The procedure for resolving disputes includes:
- communicating in writing to the other party of the dispute;
- if the dispute is unresolved after three (3) weeks referring the matter to mediation;
- attending mediation, if mediation is initiated; and
- any mediation must be initiated in Australia.
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This article contains general commentary only. You should not rely on the commentary as legal advice. Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.