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 the proposed amendments to the legislation set to come into effect from the beginning of 2015.

Interestingly, the Code has not been reviewed since 1998, when it first came into operation. As you can imagine, the franchise community welcome the recent legislative update, as many areas within the Code have been criticized for being out-dated and not reflective of the needs of the franchise community. 

The Requirement to ‘Act in Good Faith’

The planned amendments affect many provisions within the Code, such as requiring parties to a franchise agreement to ‘act in good faith’ and introducing hefty civil penalties for breaches by franchisors.

Including a requirement to ‘act in good faith’ into the Code has been urged by franchise lawyers and the franchise community for a long time. This addition will impose an obligation that parties to a franchise agreement are honest in their dealings with each other and remain cooperative and open to negotiation during the term of the agreement. This requirement cannot be contracted out of, meaning it must form part of the agreement. It’s also worth noting that this inclusion will not impact on the already established common law good faith requirements.

According to the proposed amendments, franchisors will have to give new franchisees a short overview of the advantages and disadvantages of franchising, the value of education and due diligence, actual and potential forecasted financial costs, all of which is to be given to the franchisee before they receive the disclosure documents.

These amendments will align the information given to current and new franchisees and raise the bar on disclosure requirements for the franchisor.

What other changes will be made?

There are various other proposed amendments to the Code, such as:

o   Requiring franchisors to provide electronic signatures for all disclosure documents;

o   Preventing the sending of information to franchisees without proper consent;

o   Requiring franchisors disclose any plans for sharing profits, as well as any online trading that the franchisor is involved in;

o   A more detailed, itemised explanation of the expenditures of the marketing fund;

o   Disclosing any ‘bonus’ or ‘entitlement’ the franchisor may receive as a result of successfully establishing an agreement to start leasing the particular outlet;

o   Allowing franchisees the option to review the financial history of the marketing fund by allowing them to vote;

o   Forcing franchisors to open an independent bank account for the marketing fund;

o   Ensuring all franchised outlets within the franchise system make regular contributions to the joint marketing fund; and

o   Ensuring franchisors provide reminders of the franchisees entitlement to an up-to-date disclosure document.

What are the new obligations of franchisors?

Under the revised Code, franchisors will not be allowed to:

o   Pass on dispute resolution expenses to franchisees;

o   Force franchisees to participate in dispute resolution if it is outside the state of the franchised outlet;

o   Enforcing unfairly restraint of trade provision onto franchisees if there was no renewal of the franchise agreement;

o   Stop franchisees from conversing with previous franchisees of the same company; and

o   Require substantial outlay of capital that is not explicitly disclosed in the terms of the agreement.

On top of this, the changes to the Code will mean that the ACCC will be able to audit a franchisor to get any documentation that may have been relied upon to support any representations made in the disclosure document. This requirement will ensure franchisors are held to a higher standard than before in terms of bookkeeping.

Conclusion

If you’re a franchisee and you need your right to be explained further, or a franchisor seeking clarification on your current or proposed obligations, contact LegalVision on 1300 544 755 to speak with one of our team of experienced franchise solicitors.

Emma Jervis

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