The Franchising Code of Conduct (the Code) regulates all Australian franchise relationships. It is essentially the rulebook of franchising, which is why all franchisors and franchisees should be keeping up to date with amendments to the legislation, both past and present.
Since the Code first came into operation in 1998, reviews took place in:
- 2015, bringing about several changes in the Code, including the changes discussed in this article; and
- 2019, bringing about a new round of Code changes in 2021.
As you can imagine, the franchise community welcomes regular legislative updates, as the original Code is now outdated. Therefore, it should be reflective of the present needs of the franchise community.
The Requirement to ‘Act in Good Faith’
The amendments in 2015 affected many provisions within the Code. However, a major change was the introduction of the obligation of ‘good faith’ into franchising relationships. This required parties to a franchise agreement to ‘act in good faith’ towards one another. It also introduced hefty civil penalties for breaches by franchisors.
Franchise lawyers and the franchise community urged the inclusion of a requirement to ‘act in good faith’ into the Code for a long time. Its addition has meant that parties to a franchise agreement must be honest in their dealings with each other. Further, they must remain cooperative and open to negotiation during the term of the agreement. Parties cannot contract out of this requirement and it now forms part of all franchise agreements.
Information Statement and Forecasted Financial Costs
Since the introduction of the amendments in 2015, franchisors must give new franchisees an information statement. This statement provides a short overview of the advantages and disadvantages of franchising and the value of education and due diligence (with references to resources available to franchisees). Franchisors must also provide actual and potential forecasted financial costs to the franchisee when they receive the franchisor’s disclosure document.
These amendments have substantially raised the bar on the disclosure requirements of franchisors. Additionally, they have afforded franchisees greater access to information prior to making the big decision to buy a franchise.
Continue reading this article below the formWhat Other Key Changes Occurred in 2015?
There are various other amendments that were made to the Code in 2015 which are now a normal part of franchising, such as:
- requiring that franchisors disclose any plans for sharing profits, as well as any online trading that the franchisor is involved in;
- a more detailed, itemised explanation of the expenditures of a marketing fund;
- allowing franchisees the option to vote to review the financial history of a marketing fund; and
- forcing franchisors to open an independent bank account for the operation of a marketing fund.
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What Were the Obligations Imposed on Franchisors?
Since the Code was revised, franchisors are no longer allowed to:
- pass on dispute resolution expenses to franchisees;
- force franchisees to participate in dispute resolution if it is outside the state of the franchised business;
- enforce unfair restraint of trade provisions onto franchisees if there was no renewal of the franchise agreement;
- stop franchisees from conversing with previous franchisees of the network; and
- require franchisees to undertake a substantial outlay of capital that they did not explicitly disclose in the terms of the franchise agreement.
On top of this, the changes to the Code have allowed the ACCC to audit a franchisor to get any documentation that may have been relied upon to support any representations made in the disclosure document or during the franchise grant process. This requirement holds franchisors to a higher standard than before, in terms of bookkeeping.
Key Takeaways
Since the Code changed in 2015, the franchising sector has benefited from the introduction of the obligation to ‘act in good faith’, changes to the dispute resolution process and tighter disclosure on the part of the franchisor. These obligations have been for the benefit of prospective franchisees by allowing them to make more informed decisions prior to signing franchise agreements.
If you are a franchisee and you need your rights to be explained further, or you are a franchisor seeking clarification on your current obligations, contact LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page.
Frequently Asked Questions
The good faith obligation means that parties to a franchise agreement must be honest in their dealings with each other and remain cooperative and open to negotiation during the term of the agreement.
The Franchising Code was first reviewed in 2015, bringing about new requirements, as discussed in this article. There has also been a more recent review of the Code in 2019, bringing about a new round of Code changes in 2021.
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