Franchise Code of Conduct Regulations

30 June 2010

AMENDING REGULATIONS TO THE FRANCHISING CODE OF CONDUCT COME INTO EFFECT ON 1 JULY 2010

Changes to the Franchising Code of Conduct (“Code”) will take effect from 1 July 2010 and will apply to franchise agreements entered into on or after that date. The changes give effect to the Government’s proposed reforms following upon the report of the Commonwealth Parliamentary Joint Committee on Corporations and Financial Services Inquiry into Franchising, those responses of the Government culminating in the release of the Expert Panel’s report and the acceptance and support of the report by the Government.

The impact of those changes puts franchisees in a better position to understand the risks of entering into a franchise by having more detailed information at the initial stages of negotiating about the terms and conditions under which the franchise will operate.

Dr Craig Emerson, Minister for Small Business, said that the amendments, aimed at protecting franchisees, mean franchisors are now required to disclose more information that franchisees need to make decisions about their businesses.

It will be noted below that certain aspects of the regulations require disclosure to be made by the franchisor relating to activities that have taken place over the previous three years.  In order to provide franchisors sufficient time to gather the relevant details, the requirements will be introduced on a “stepped” basis i.e. after the first year (2010-2011) franchisors will have to provide information for one financial year, and, after the second year two financial years and so on.  By 2013 the provisions will be fully operational.

The introduction of new changes to the Code which take place from 1 July 2010 are as follows:

• It will be a requirement for franchisors to inform franchisees six months before the end of the agreement whether or not they intend to renew or enter into a new agreement. This will give a franchisee adequate time to plan for the future.
• The Code will include a list of necessary and desirable behaviours to encourage parties to approach a dispute resolution process in a reconciliatory manner (including attending and participating in meetings at reasonable times).
• The Government will include a provision in the Code providing that nothing in the Code will limit any common law requirement of good faith in relation to a franchise agreement to which the Code applies.  Originally it was suggested that the obligation of good faith should be enshrined in the Code but it was felt that the vagueness of the term might result in adverse commercial consequences, so it was decided to rather avoid that obligation and leave it open to common law.

Franchisors will be required to include in disclosure documents:

• an express statement that franchising is a business and like any other business the franchise could fail.  As some franchisees enter into these agreements rather starry-eyed and expecting immediate success, it is hoped that this disclosure will provide the franchisee with a realistic expectation.
  • circumstances in which unilateral variations to the franchise agreement may take place.  The franchisor must detail circumstances where it has unilaterally varied the franchise agreement in the previous three financial years, on the “stepped” basis mentioned above.
  • circumstances where the franchisor requires a franchisee to undertake significant capital expenditure during the course of the franchise arrangement, which were not disclosed before the franchisee entered into the agreement.  Examples of this are circumstances requiring the purchase of new equipment or refurbishments in order to maintain a competitive advantage for the operation.
  • what will happen at the end of a franchise agreement e.g. whether or not a franchisee has a right to renew the franchise agreement, sell the franchise at the end of the term, or if the franchisee is entitled to an exit payment at the end of the term the method of calculation of such payment.
  • in order to ensure that the franchisee has full disclosure of what might occur at the end of the agreement, a provision advising whether it will consider any significant capital expenditure undertaken by the franchisee during the agreement in determining the arrangements that apply at the end of the  agreement e.g. an exit payment or renewal.
  • whether, during the last three financial years, the franchisor has in fact taken into account any significant capital expenditure undertaken by franchisees, in determining arrangements to apply at the end of the agreements.
  • if so intended, the fact that the franchise agreement could be changed even when the franchisee is trying to sell the business.
  • whether it will attribute its costs incurred in dispute resolution, to the franchisee. The current Code provides that the franchisor and franchisee are equally liable for the costs of attending mediation, unless otherwise agreed.
  • what information a franchisee may and may not discuss with existing and former franchisees bearing in mind that Clause 15 of the Code currently prohibits a franchisor from inducing a franchisee or potential franchisee not to contact an existing franchisee for a lawful purpose. Clearly, when a franchisee is selling its business, the franchisee will be required to make disclosure of some confidential information to a prospective franchisee to enable that party to make an informed decision.

Dr Emerson said that in addition to these amendments, the ACCC has been given new powers to conduct random audits of franchisors. These audits will focus on ensuring franchisors comply with the law.

Apart from some minor amendments to clarify existing provisions of the Code, it is expected that these new provisions will contribute to a more harmonious relationship between franchisors and franchisees and further reduce the opportunities for conflict and dispute.

For further information please contact Rodney Saw, Mari Ross or Jonathan Kaplan on 9510 0366