Franchising in Australia is regulated by the Franchising Code of Conduct (Code).
The Code has been recently overhauled noting that from 1 January 2015 a new Franchising Code of Conduct came into force and applies to most franchise agreements.
The New Code
The most significant change to arise from the New Code was the requirement that each party to a franchise agreement acts in “good faith” in respect of any matter regarding a franchise agreement or the new Code. This requirement applies to conduct after 1 January 2015 in relation to all franchise agreements entered into after 1 October 1998.
This obligation will apply not only during the term of a franchise agreement, but also during pre-agreement negotiations and disputes after termination. Parties cannot “contract out” of the good faith obligation.
As a result of the good faith obligations, disclosure requirements are more important than ever. To this end, there are a number of changes to the disclosure requirements in the new Code, including a new form of disclosure statement which requires additional disclosures (for example, in relation to litigation involving directors of the franchisor’s associates and also information regarding online sales).
In addition to the disclosure statement, franchisors must give prospective franchisees an “information statement” (in the form set out in the new Code) which summarises key franchising “risks and rewards”. We comment in detail on the Disclosure Document and obligations below.
The Disclosure Document
Whilst the Code contains many obligations, one of the significant features of the Code is that it requires all franchisors to create a document known as a disclosure document.
The purpose of a Disclosure Document is for the franchisor to:
- give it to a prospective franchisee (at least 14 days before the franchisee signs the franchise agreement);
- give it to a franchisee intending to renew or extend a franchise; and
- provide information to help the prospective or existing franchisee make a reasonably informed decision about the franchise.
The content and format of the disclosure document is prescribed by the Code. All franchisors must disclose the same information. However, some franchisors will be more forthcoming than others.
The type of information that is required in the disclosure document is wide-ranging. Examples of some of the information includes:
- Details of the franchise system and its history;
- Details of the franchisor’s team;
- Details of intellectual property, including any trademarks licensed to the Franchisor;
- Contact details for existing franchisees;
- Details of all payments – including initial, ongoing and items of capital expenditure;
- Earnings information (if the franchisor chooses to disclose earnings information), including the assumptions underlying that earnings information. Alternatively, the franchisor may choose not to disclose any earnings information;
- A solvency statement from the directors and a copy of the most recent financial statements. These financial statements do not have to be included if a solvency statement is supported by an independent audit.
How does the Code apply to the Franchise Agreement?
The Franchising Code of Conduct does not regulate the content of the franchise agreement itself, noting this will be up to the discretion of the franchisor.
However, it does regulate issues relevant to the franchise agreement and the franchise, such as when a copy of the agreement must be provided to the franchisee and details of cooling off periods and dispute resolution.
If you require franchise advice, we suggest you get this before you enter into any agreement. Call us on 1300 544 755 today to speak to one of our experienced franchise lawyers.