In Short
- Franchisors must act in good faith throughout the franchise relationship, including negotiations, day-to-day dealings, and post-termination matters.
- Strict disclosure obligations apply. You must provide prospective franchisees with key documents, including a disclosure document and the franchise agreement, at least 14 days before signing.
- The Code limits certain contract terms, such as restraint of trade clauses, legal cost allocations, retrospective changes, and liability waivers, to protect franchisees.
Tips for Businesses
Make sure your franchise agreements and processes align with the Franchising Code of Conduct. Always act honestly and fairly, provide all required disclosures early, and avoid including unfair terms in your contracts. If you are unsure about your obligations, seek legal advice to avoid penalties and maintain strong franchise relationships.
In Australia, the Franchising Code of Conduct (‘the Code’) heavily regulates how franchise members must conduct themselves, including before they sign the franchise agreement and after its termination. Typically, franchisees are the more vulnerable party under the franchise agreement. So, the Code is more demanding on you as a franchisor. Therefore, you must know your obligations under the Code to avoid penalties. This article explains three key things that franchisors should know about the Code.
1. Duty to Act in Good Faith
One of the Code’s overarching principles is that franchisors and franchisees must act in good faith in their dealings. The duty of good faith requires both you and franchisees to conduct yourselves honestly, fairly, and reasonably in your dealings with each other. The scope of this duty is quite broad, covering the entire lifecycle of the franchise relationship from pre-agreement negotiations through to post-termination disputes.
Acting in good faith means you must be reasonable in your conduct. Do not exercise your powers arbitrarily or for purposes unrelated to your franchise agreement. Be honest in your dealings and avoid acting with ulterior motives. For example, do not treat a franchisee differently just because they have raised concerns about your franchise system.
Remember, good faith does not mean you have to sacrifice your legitimate commercial interests. During negotiations, you do not have to make every change a franchisee requests if it does not benefit you commercially. However, you should be honest and cooperative throughout the process.
By understanding and adhering to this duty, you will foster better relationships with your franchisees and avoid potential penalties for breaching the Code.
2. Duty to Disclose
As a franchisor, you have strict disclosure obligations under the Franchising Code of Conduct. These requirements are designed to ensure potential franchisees have all the information they need to make an informed decision before joining your franchise system.
Your disclosure duties begin as soon as you receive an expression of interest from a prospective franchisee. At this stage, you must provide them with an information statement. This document gives an overview of franchising and highlights key considerations for potential franchisees.
If the prospect decides to proceed, you must provide them with a more comprehensive set of documents at least 14 days before they sign the franchise agreement. This is known as the consideration period, which is a legal requirement and is designed to give the prospective franchisee time to review all the information and seek professional advice if needed.
This factsheet sets out the three key financial disclosure obligations every franchisor needs to comply with.
The documents you will need to provide franchisees entering the franchise system the following:
- disclosure document;
- the Code;
- franchise agreement;
- lease documents (if applicable); and
- any other documents that are material to the franchise offering, such as software agreements or loan documents.
Your disclosure document must follow the standard forms set out in the Code. Within this document, you must disclose information regarding the operation of the franchise system as a whole, including:
- the structure of your franchise system;
- an overview of current franchisees (including basic statistics and the numbers of franchises that you resold or terminated within the past three years); and
- an overview of your financials, including copies of financial statements.
If you or an associate are involved in leasing the premises where the franchise will operate, you have additional disclosure obligations. You must provide lease documents if you are directly leasing the premises and subletting to the franchisee, or if you are receiving any financial benefit from the lease arrangement.
Continue reading this article below the form3. The Code and Franchise Agreements
As a franchisor, you need to understand how the Franchising Code of Conduct interacts with your franchise agreements. The Code does not regulate the content of the franchise agreement itself. However, it does limit what you can put into a franchise agreement. These limits include rules around:
- restraint of trade clauses that prevent a franchisee from working elsewhere once the franchise agreement ends. You cannot impose unreasonable limitations on what your franchisees can do after their agreement ends. The Code balances your need to protect your business interests with the franchisee’s right to earn a living
- terms about who pays for legal costs and settling disputes. You cannot simply make franchisees bear all the costs. Be careful about how you structure these clauses to ensure they are fair and compliant;
- your ability to make changes to franchise agreements that have retrospective application. The Code restricts your ability to apply changes retrospectively. This protects franchisees from unexpected alterations to their agreed terms;
- a general release of your liability as a franchisor. The Code aims to ensure you remain accountable for your actions as a franchisor; and
- waivers of any statements you make to a franchisee. Similarly, you cannot ask franchisees to waive any verbal or written statements you have made. This ensures you are held to the representations you make during the franchise relationship.
The Code also regulates how you, or your franchisee, can terminate a franchise agreement by outlining the process either party must follow. It would be helpful to note that these clauses will apply, despite any contrary clauses you include in the franchise agreement.
Additionally, the Code provides a 14 day cooling-off period for franchisees after signing the franchise agreement. If your franchisee changes their mind during this period, you must provide them with a full refund of any money paid to you, less your incurred ‘reasonable’ expenses as disclosed to the franchisee.
Key Takeaways
As a franchisor, you must understand the key terms in the Franchising Code of Conduct. Notably, you should be aware of:
- your duty to act in good faith;
- your duty to disclose certain documents 14 days before a franchisee enters the franchise system; and
- how the Code regulates what you can include in any new franchise agreement.
If you have questions about the Franchising Code of Conduct, our experienced franchising lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
The Franchising Code of Conduct is a mandatory industry code that regulates the conduct of Australian franchisees and franchisors.
The Australian Competition and Consumer Commission (ACCC) can issue you a penalty if you; breach your duty to act in good faith, create a disclosure document that is not Code-compliant, fail to provide lease information where it is applicable or fail to attend the dispute resolution processes under the Code.
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