Franchising Code Reforms

28 October 2014

Reforms to the Franchising Code of Conduct (“the Code”) are imminent.

The Government released the Exposure Drafts of legislation in April 2014 to introduce changes to the Code and amendments to the Competition and Consumer Act 2010 (Cth) to add new penalty provisions in relation to breaches of the Code.

The new Code will apply to all franchise agreements entered into or renewed on or after 1 January 2015.

The most significant changes include:

  • new civil penalty provisions in respect of fines the ACCC can impose for breaches of the Code, up to $51,000;

  • an express obligation for the parties to act in good faith;

  • new disclosure requirements; and

  • a release of some post franchise restraints in some instances.

Tougher Penalty Provisions

The introduction of tougher penalty provisions is intended to encourage improved compliance with the Code.  In addition to the imposition of fines, the ACCC will be given increased powers to issue infringement notices for breaches of the Code with accompanying fines of up to $8,500 without the need for a Court Order.

The ACCC is also able to use its audit powers to obtain documents the franchisor has relied upon to make the representations contained in the Disclosure Document and there is a corresponding obligation for franchisors to now retain this supporting documentation[1].

Civil penalty provisions have also been introduced in respect of unlawful termination of a franchise agreement, including in relation to repayment of monies by the franchisor[2], the franchisor allowing a reasonable time for a franchisee to remedy a breach before terminating the franchise agreement[3] and reasonable notice of the termination of a franchise agreement by a franchisor is required where the franchisee has not breached same[4].

Obligation to Act in Good Faith

The new express obligation for the parties to act in good faith applies in relation to any matter arising under or in relation to a franchise agreement or the Code.  This includes when the parties are engaging in their negotiations and discussions prior to entering into a franchise agreement as well as during the franchise relationship and any dispute in relation to the franchise agreement.

Although not specifically defined[5], the obligation to act in good faith includes the requirement for a person to act honestly and not arbitrarily and to cooperate to achieve the purposes of the franchise agreement[6]. This obligation does not prevent a party from acting in their own legitimate commercial interests[7].  Franchise agreements permitting the franchisor the ability to make decisions or take action that may be interpreted as ‘arbitrary’ should therefore be reviewed and amended accordingly.

Changes to Disclosure Requirements

The pending amendments to the Code remove the need for duplicate disclosure in relation to master and foreign franchisors[8] and the summary of provisions of the franchise agreement will also no longer be required to be set out in the disclosure document. 

There will also be new disclosure requirements imposed on franchisors from January 2015.  These include a new requirement for a franchisor to make disclosures in respect of online sales, including whether a franchisor or any of its associates make goods or services available online[9], and franchisors will also be required to provide an information sheet in a prescribed form[10] as soon as it becomes apparent to the franchisor that a franchise agreement will be or is likely to be entered into by a prospective franchisee.

Franchisors should also be made aware of the increased disclosure obligations in respect of marketing funds.

Dilution of Restraint Clauses

Where a franchise agreement ends and the franchisee is paid nominal or no compensation by the franchisor a restraint of trade clause in a franchise agreement will have no effect, provided the franchisee meets certain criteria[11].  This means that franchisors who do not permit the sale of the franchised business or allow for other compensation for the goodwill of the business at the end of the franchise term, or where a franchise agreement is not renewed, will not be able to enforce restraint of trade clauses against (former) franchisees.

Next Steps

The new Code introduces a number of significant changes, which include but are not limited to the above.  Franchisors should seek advice in respect of the review and amendment of their franchise documentation and about the new rights and obligations of franchising parties. 

Steps should be taken now to ensure compliance with the new Code from 1 January 2015.

[1] Clause 20(2) Competition and Consumer (Industry Codes – Franchising) Regulation 2014

[2] Exposure Draft of Code Schedule 1, Part 3 Division 5 Clause 27(3)

[3] Ibid Clause 28(2)

[4] Ibid Clause 29(3)

[5] Clause 7(8) of the Exposure Draft of the Code expressly provides that the Code does not exclude or limit any common law obligations of good faith to the parties to a Franchise Agreement.

[6] Exposure Draft of the Code Schedule 1, Part 1 Division 3, Clause 7

[7] Ibid Clause 7(6)

[8]Exposure Draft of the Code Schedule 1, Annexure 1 Clause 7 requires disclosure of the Master Franchisor’s details where the franchisor is also a sub-franchisor

[9] Ibid Clause 12

[10] As set out in Annexure 2 of the Exposure Draft of the Code

[11] Exposure Draft of the Code Schedule 1, Part 3 Division 3 clause 24