This article appears in the Jan/Feb 2015 issue of Business Franchise Australia & New Zealand
The Franchising Code of Conduct which regulates franchise relationships in Australia has now changed in one of the most significant reviews since its inception in 1998.
The revised Code aims to create a fairer and more balanced playing field for those partnering under the guise of a franchise. This article now aims to outline for franchisees the main protections offered to them by the Code and the primary relevant reforms and changes.
New Disclosure Provisions
The main disclosure requirements on franchisors remain. Franchisors are still required to provide prospective franchisees, at least 14 days before any non-refundable payments are made or before franchisees are to sign any agreement, a current disclosure document setting out key information about the franchise, a copy of the franchise agreement in the form in which it is to be executed and the Code.
In addition:
• franchisors must now disclose information about online trading to prospective franchisees to allow them to more fully assess the viability of the business and franchisors are now required to provide to prospective franchisees an information sheet which provides an overview of the advantages and risks of franchising generally, in a form set out by the Code.
• Where a franchisee leases or occupies premises from the franchisor, the franchisor must now also disclose any incentives or financial benefits which the franchisor is entitled to receive as a result of the lease. Potentially, this could include details of any fitout contributions or other payments the franchisor has received as a result of the lease, introducing far more transparency in relation to occupancy arrangements.
• Failure by franchisors to comply with their disclosure requirements now also attracts new civil penalties of up to $51,000.
However, franchisors are no longer required to summarise the main provisions of the franchise agreement in the disclosure document and in tiered franchising arrangements, head franchisors no longer have disclosure obligations toward subfranchisees – a change which could limit the ability of franchisees to assess the viability of the overall franchise group.
Overall, these changes are intended to offer franchisees more valuable information prior to their entry into a franchise agreement.
New Duty of ‘Good Faith’
One of the most important new additions for the protection of franchisees is an express so called ‘duty of good faith’ incorporated into the Code. Good faith duties put obligations on both franchisees and franchisors to effectively cooperate and mutually act in the best interests of their relationship and each other and to avoid actions which, while they may be permissible at law generally, might be unduly harsh or damaging if the other party has not had a chance to try to address the issue.
While franchisors and franchisees were already under common law obligations to act in good faith and cooperate with each other, the amended Code has included an additional, express obligation not only during the term of the franchise agreement, but also during the discussion and negotiating phases of a new franchise relationship and in any disputes which might arise between a franchisor and franchisee under the franchise agreement. This is a significant additional obligation on both franchisors and franchisees which both franchisees and franchisors need to be aware of.
The review recommended that the good faith obligation not be specifically defined and the Government has opted not to define the obligation in the Code, although some limited guidance is given. Franchisees and franchisors need to ‘act honestly and not arbitrarily’ and ‘cooperate to achieve the purposes of the franchise agreement’.
As a result of this change, franchisors in particular need to be careful in drafting their franchise agreements to make sure that provisions of the agreement cannot be construed as giving them the power to make decisions or take actions which could be seen as ‘arbitrary’ – a welcome additional protection from the perspective of franchisees which should see franchisors more careful to provide rationale for any powers set out for them in their franchise agreements.
Stronger Enforcement Provisions
In a bid to improve compliance, the Government has introduced new penalties for breaches of the Code of varying severity. Serious breaches of some provisions could attract civil penalties of up to $51,000.
The ACCC has also received new powers to issue infringement notices for breaches of the Code for fines of up to $8,500, without the need for a court order, although payment of the infringement notice does not amount to admission of a breach of the Code and appeal against these may be lodged with the ACCC. The ACCC can also utilise its audit powers to obtain any documents the franchisor has relied on in its disclosure statements and there is an obligation on franchisors to keep all such documents.
The penalties, although these may not be issued lightly, will most certainly put franchisors on notice of the immediate consequences without the franchisee having to take any action and incur any costs.
Limitations on Waivers
The new Code also limits to what degree a franchisor can require a franchisee to provide the franchisor a general release of liability or a waiver of any representations made. This provides extra onus on franchisors to ensure that any representations they make are accurate and correct. In the past franchisors would often require franchisees to sign waivers with respect to any prior representations made by the franchisor. It is unclear what effect this practice will now have as franchisees have always had the protection of the law in circumstances where the waivers may have been unreasonable.
New Dispute, Jurisdiction and Costs Provisions
Disputes and jurisdiction, including mediation, must now be based in the state or territory in which the franchised business itself is located, and must not be outside of Australia.
This is a significant departure from established practice, which would generally seek to set the jurisdiction in the state in which the franchisor operates.
Similarly, the Code now provides that a franchise agreement must not include a clause that requires a franchisee to pay the franchisor’s costs in relation to settling a dispute under the franchise agreement.
Capital Expenditure Restrictions
The new Code places franchisors under significant new obligations to justify any capital expenditure required of franchisees, as well as any other payments and their rationale, and otherwise prohibits any requirements for significant capital expenditures from franchisees.
While it is unclear how these changes will translate into practice, the new Code provides significant additional protections to prospective franchisees and transparency as to capital costs which they may be required to pay.
Disclosure Requirements for Non Renewable Franchise Agreements
The Code now requires that where a franchise agreement does not provide for an option to renew the franchise, clear and bold statements must be provided to the franchisee to that effect.
These changes are in line with the overarching theme of greater disclosure to franchisees and greater transparency in franchise arrangements.
Conclusion
The overall effect of the new Code is one of greater certainty and transparency for franchisees, with significant new rights and safeguards intended to protect franchisees and significant new obligations upon franchisors.
Prospective franchisees can feel more reassured than ever that the franchise arrangements they are entering into are required to be fully disclosed, and that significant protections are afforded to them to make sure the commercial arrangements required of them are fair and reasonable. Nonetheless, a prospective franchisee must be vigilant against laxity, and must always undertake comprehensive due diligence and obtain professional advice. In this respect the new Code has not changed the importance of quality, qualified advice prior to entering into such important documents.
Baybridge Lawyers recommends that all prospective franchisees seek qualified and professional advice prior to signature of any franchise documentation.
Bianca Sevastos, a Partner at Baybridge Lawyers, specialises in franchising and licensing, advising on all aspects of franchising industry compliance with the Code, day-to-day management of franchise systems and relationships with suppliers and franchisees.
Bianca has extensive experience and advises on a range of national and international transactions, industry master and area development rights and advises both franchisors and franchisees in dispute, obligations under the Franchising Code of Conduct and the Competition and Consumer Act.
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