January 7, 2015

The New Franchising Code and How It Will Impact You

In November 2014, the Australian Government released the new Franchising Code of Conduct (New Code) to take effect from 1 January 2015. The New Code will apply to all franchise agreements, subject to some transitional exceptions.

It is crucial for both franchisors and franchisees to understand the ramifications of the New Code on franchise agreements.

A summary of the key changes are set out below:

Duty to act in good faith
This obligation will apply the common law duty of good faith to all parties in a franchise relationship, including during negotiation or dispute resolution, and will set out some non-binding indicative factors as to what that duty requires.

Post agreement restrictions on restraints of trade
Where the franchise agreement is not renewed at the end of the term, a restraint provision will no longer be enforceable without reasonable consideration. However, the franchisor’s intellectual property will continue to remain protected under the New Code.

Disclosure requirements
The requirements of a disclosure document have also been modified in the New Code. These include, for example, certain disclosures around the supply of goods and services in relation to online sales as well as dealing with arrangements at the end of the franchise agreement. The New Code will also require a franchisor to provide an information sheet containing an overview of the risks associated with franchising.

The “double disclosure” requirement has also been removed, with franchisors who appoint master franchisors no longer required to provide a separate disclosure document to a franchisee. The master franchisor will now be required to disclose certain information about the head franchisor in their disclosure document.

A transitional period exists which allows franchisors to use an existing disclosure document up until 1 November 2015.

Financial penalties for breaches of the New Code
The Australian Competition and Consumer Commission (ACCC) can seek civil penalties of up to $51,000 per breach for contraventions of the New Code. As an alternative to a civil penalty, the ACCC can issue an infringement notice of up to $8,500 per breach. The ACCC will now be able to seek multiple penalties for the same conduct under the New Code.

Significant capital expenditure restrictions
The New Code places restrictions on circumstance in which franchisors can require franchisees to incur significant capital expenditure, such as to undertake a new fit-out. This is to ensure that careful disclosure is made to franchisees of the costs involved in running the business.

Improved transparency of marketing funds
The transparency of the administration of marketing funds will be improved under the New Code. This will include the requirement for a franchisor to establish a separate bank account, and to ensure funds are spent on legitimate marketing and advertising expenses.

It is strongly recommend that franchisors have their franchise agreements reviewed and updated to ensure compliance with the New Code as soon as possible. Despite the transitional period, given the financial penalties associated with a breach of the New Code, it is also strongly recommended that franchisors have their disclosure documents reviewed and updated well in advance of the end of the transitional period.