Amendments to the Franchising Code of Conduct to Bolster Franchisee’s Rights and Reduce Red Tape for Franchisors Franchising

Amendments to the Franchising Code of Conduct have been in the woodworks for some time now and the proposed amendments are to take effect from 1 January 2015.
Surprisingly such amendments are not intended to have retrospective effect and as such the amendments will only apply to franchise agreements entered into on or after 1 January 2015 or renewed on or after 1 January 2015.

From 1 January 2015 it is proposed that the following significant changes be implemented:

CHANGES WHICH WILL BOLSTER THE FRANCHISEE’S RIGHTS |
Restraints of Franchisee’s not enforceable in certain circumstances
A restraint clause in a franchisee agreement will not be effective if:

• The Franchisee had sought to renew the agreement on substantially the same terms and was not in breach of the agreement;
• The Franchisor does not renew the agreement; and
• Either (a) the agreement did not allow the Franchisee to claim compensation in the event that it was not renewed or (b) the Franchisee claimed compensation for non-renewal but it was merely a nominal amount and did not genuinely compensate the franchisee.

Capital Expenditure

A Franchisor must not require a Franchisee to undertake significant capital expenditure (example, renovations to premises) during the term of a franchise agreement without careful planning.
However, this amendment has some exceptions, such as in the case of where such capital expenditure is disclosed in the disclosure document or where it is agreed by a majority of Franchisees.

Marketing contribution by Franchisors

If a Franchisor operates one or more voting rights in a franchise business the Franchisor must pay marketing fees on behalf of each voting right on the same basis as other franchisees.

Disputes

Franchisors cannot include a clause which attributes the cost of dispute resolution to the Franchisees, and Franchisors cannot require Franchisees to conduct dispute resolution outside the State where their franchised business is located (unless otherwise agreed between the parties).

Obligation of Good Faith

This is a new concept to be introduced into the Code which requires an express obligation on parties to a franchise agreement to act towards another party with good faith. The Code will include a statutory definition of good faith which (in summary) requires the parties to act honestly and not arbitrarily and to cooperate to achieve the purposes of the franchise agreement in respect of any matters arising in relation to the franchise agreement and the Code.

The Code will include penalties on either party who is found to be not acting in good faith. The ACCC will also be allowed to seek pecuniary penalties and issue infringement notices for breaches under the Code.

CHANGES TO REDUCE RED TAPE FOR THE FRANCHISOR’S … OR NOT REALLY

Removal of double disclosure requirement – Master franchisors do not need to comply with this disclosure requirements in respect of sub-franchisees.

Marketing – Franchisors must provide further disclosure on the types of expenses marketing funds are being used for and must maintain a separate bank account for receipt of the marketing and advertising fees contributed by the Franchisee.

Documentation and signatures can be given electronically – There is express recognition in the Code that any requirements under the Code to provide notices and documents in writing (including any requirements to provide signed documents) can be complied with electronically unless the other party has advised otherwise in writing (i.e. the default position is that electronic provision of documentation and signatures is accepted).

Record keeping – If the new Code requires or allows a Franchisee to give something to a Franchisor in writing, the Franchisor must retain it, or a copy. Also, if the Franchisor makes a statement or claim in a disclosure document and relies on a document to support that statement or claim, the Franchisor must keep that supporting document.

Extensive details of associates must be disclosed – In addition to outlining each corporate associate of the Franchisor (already required by the Code), the disclosure document will also need to include:
• A description of the relationship with the corporate associate and the relevance of the relationship to the franchise system and the franchise;
• Details of current proceedings and specific proceedings and offenses relating to associates (including directors of any corporate associate); and
• The number of businesses similar to the franchised business which are owned or operated in Australia by an associate of the franchisor.

No renewal statement – If the Franchisee does not have the option to renew the franchise agreement or extend the term of the franchise agreement, the disclosure document must include a prescribed statement intended to alert the Franchisee to this risk.

If you require any assistance regarding your franchise, any renewal or are considering buying a franchise and would like further information, please contact us.