This article was previously published on the Inside Franchise Business website.
The Franchising Code of Conduct is a mandatory industry code. It contains a process to determine what constitutes a franchise agreement, and regulates the conduct of franchisors and franchisees towards each other.
The Code has been in force since 1 October 1998 and it sits within the Competition and Consumer Act 2010. A revised version was introduced on 1 January 2015 which governs all franchise agreements entered into, renewed, extended or varied on or after that date. Some conduct under franchise agreements entered into before 1 January 2015 will continue to be governed by the former Code.
The Code can be found on the website of the Australian Competition and Consumer Commission (ACCC).
How the Code affects you as a franchisee
The Code sets out obligations and procedures which must be followed and cannot be waived. Some of these include:
1. The franchisor must maintain a disclosure document in a prescribed format containing information about the franchise system. It must be updated annually and must include details about current and former franchisees, all costs you can expect to incur during the course of the franchise and any litigation that the franchisor is involved in.
2. A current disclosure document must be given to you along with a copy of the proposed franchise agreement and a copy of the Code at least 14 days before a franchise agreement is entered into.
3. You are granted a seven day cooling off period after entering into a franchise agreement, except on renewals, variations or transfers of existing franchise agreements.
4. Before entering a franchise agreement, you must give the franchisor a statement about whether or not you received legal, accounting and business advice. It is not mandatory for you to obtain this advice, but you do need to tell the franchisor if you did.
5. There are rules governing how a franchisor can operate a marketing fund. Franchisors must be transparent about what they use the fund for and provide you with annual statements.
6. Franchisors are subject to certain restrictions when requiring you to undertake significant capital expenditure (such as store and equipment upgrades).
7. Franchisors must give notice requiring breaches to be remedied and give a reasonable time (no longer than 30 days) to remedy a breach before terminating the franchise agreement. There are limited circumstances where this does not apply and the franchisor can terminate your agreement immediately, for example, if you become bankrupt, act fraudulently or endanger public health and safety.
8. There are processes to be followed for the resolution of disputes, which include mediation.
9. There is an obligation for franchisors and franchisees to act in good faith in their dealings with each other. This does not though restrict either of you from acting in your genuine commercial interests.
Why does the Code exist?
The purpose of the Code is to even-out the power imbalance which exists in a franchise relationship. Franchisors generally have the greater share of power in the relationship, so the Code places limits on this power, but at the same time ensures both franchisors and franchisees act fairly.
The Code also endeavours to ensure that you are made aware that signing up to a franchise is a significant commitment and that you are provided with the right information to make an informed decision as to whether a franchise model is the right choice for you.
Breaching the Code
The responsibility of enforcing the Code rests with the ACCC. Any breach of the Code is also a breach of the Competition and Consumer Act.
Breaches of some provisions will attract penalties of up to $63,000 in each instance, and these breaches may lead to infringement notices issued by the ACCC for $10,500 per breach.
Compliance with the Code must therefore be taken seriously by all parties to a franchise agreement.