Franchise Industry – Upcoming Policy Reforms – The Legal Update.

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Table of Contents

• Proposal #1 – Reduce Franchise Red Tape
•  Proposal #2 – Improve Availability of Information for Franchisees
• Proposal #3 – Address the imbalance between the franchisor and franchisee
• Proposal #4 – Improve Franchisor and Franchisee Conduct

By Ursula Hogben and Priscilla Ng There are some significant reforms proposed for the franchise industry. The franchise industry is currently regulated by the Franchising Code of Conduct (“Code”) under the Competition and Consumer Act 2010. The Code was reviewed last year by Mr Alan Wein, an experienced mediator for the Office for the Franchising Mediation Adviser. He made several recommendations to remove the red tape and improve the overall performance of the Code.  Following these recommendations, the Federal Government has proposed franchising policy reforms.

Proposal #1 – Reduce Franchise Red Tape

The Government proposes to:

1. reduce the length and complexity of the franchise disclosure document. How? By removing the disclosure obligations in relation to the summarising provisions;
2. remove the compliance burden currently imposed on master franchisers. How?  Master franchisors will no longer need to comply with disclosure requirements for sub-franchisees, as disclosure would have already been made to franchisees;
3. accept electronic documentation signatures; and
4. amend the Code to increase consistency of practice in the franchise industry.

 Proposal #2 – Improve Availability of Information for Franchisees

The Government intends to increase availability of information to franchisees by:

1. introducing an information sheet.  Franchisors will be required to provide franchisees with an information sheet detailing the risks and rewards of owning a franchise business. The goal is to encourage franchisees to conduct a more thorough due diligence process before becoming contractually bound and financially committed;
2. requiring disclosure about online activity.  Franchisors will be required to disclose online trading activities, the territory to which online sales may be supplied, and how this could impact on franchisees; and
3. increasing disclosure and protection about marketing expenses.  Franchisors will be required to disclose the types of expenses that marketing funds are being used for, and maintain a separate bank account for the franchisees’ marketing contributions.

Proposal #3 – Address the imbalance between the franchisor and franchisee

The Government seeks to address the imbalance between the franchisor and franchisee in the following areas:

1. dispute resolution: preventing franchisors from attributing costs of dispute resolution to franchisees. This can act as a disincentive for franchisees to raise concerns;
2. capital expenditure: enhancing protections for franchisees in preventing franchisors from imposing significant capital expenditure unless it is disclosed in the franchisee agreement, a majority of franchisees agree, or is necessary expenditure justified by a statement by the franchisor;
3. restraints of trade: preventing franchisors from unreasonably imposing restraints of trade.  Restraints may rendered invalid in some circumstances; and
4. contributions: ensuring that franchises owned by the franchisor also contribute to the system’s marketing and other funds.

Proposal #4 – Improve Franchisor and Franchisee Conduct

The Government intends to address questionable conduct of both franchisors and franchisees by:

1. introducing a duty for each party to act in good faith, i.e. to act honestly and cooperatively, in the event of any further discussions, negotiations or disputes in relation to the agreement or throughout the term;
2. introducing civil pecuniary penalties of up to $51,000 for serious breaches of the Code;
3. allowing the ACCC to utilise audit powers to obtain documents that the franchisor relies upon in their disclosure document;
4. giving the ACCC power to issue infringement notices of up to $8,500 without court action; and
5. preventing franchisors from interfering in communications between ex and prospective franchisees.

Franchising is a significant part of the Australian economy.  Franchises employ hundreds of thousands of Australians and providing accessibility to popular brands and chain stores. The Federal Government is demonstrating its commitment to assisting the growth of the franchising industry, with these proposed reforms.  These policy reforms are expected to take place from 1 January 2015.   We can assist you with your franchise and help your organisation to comply with law reforms. Contact us today for a free initial assessment and a fixed fee price, for your peace of mind.