Get to know: Franchising Code of Conduct
This article appears in the July/August 2013 issue of Business Franchise Australia & New Zealand
Every savvy franchisee should be aware of their rights under the Franchising Code of Conduct (the Code).
This mandatory industry code sets out the legal rights and obligations of all participants in the franchising industry, and assists you in making reasonable and informed decisions about purchasing a franchise.
The Code provides you with certain protections during the term of your franchise and includes dispute resolution procedures. The Code also places obligations on your franchisor that impacts on the ways in which they can end your franchise agreement, and provides you with rights in instances where you choose to leave the franchise system. An awareness of the rights and obligations that the Code provides can assist you in running your business successfully and interacting with your franchisor in the most effective way possible.
Before entering into a franchise agreement
When it comes to business, failure to prepare may mean that you are preparing to fail. The Code places obligations on franchisors that can help you in preparing to run your business, and ensure that you are well informed before making any permanent decisions.
The Code requires your potential franchisor to provide you with a disclosure document in the form set out in the Code, at least 14 days before you enter into, renew or extend a franchise agreement. This document will contain a lot of the key information about the franchise, including:
- what payments you’ll be required to make
- whether you will have an exclusive territory
- how goods and services are to be supplied
- what happens when your agreement ends.
It will also provide information about existing and past franchisees, the business experience of the franchisor, and whether the business or franchisor is involved in certain types of court actions. All of this information provides you with a clearer picture of how the franchise is run, and whether it is the right business opportunity for you.
The Code also provides new franchisees with “cooling-off” rights. This means that you are able to terminate a new franchise agreement within seven days after entering into the agreement or paying any nonrefundable money (whichever is earlier).
If you choose to exercise your cooling off rights, your franchisor must provide you with a refund – minus any reasonable expenses they have incurred – within 14 days. The cooling-off rights only apply to new franchise agreements, and do not cover agreements involving the renewal, extension or transfer of an existing franchise.
Running your franchise successfully
The Code outlines what must be set out in a franchise agreement. The franchise agreement is the contract that outlines how you are to run your business and interact with your franchisor, so the support and framework provided by the Code can be very important.
The Code requires that your franchisor must provide you with certain rights in relation to your franchise agreement. In particular:
- A franchisor can’t stop you forming an association or associate with other franchisees or prospective franchisees for a lawful purpose.
- A franchise agreement must not contain, or require you to sign, a statement that releases your franchisor from general liability towards you.
- A franchise agreement must not contain, or require you to sign, a waiver of any verbal or written representation made by the franchisor.
The disclosure requirements discussed earlier can also provide current franchisees with useful information. For example, the Code requires that your franchisor inform you of any materially relevant facts about the franchise in writing within 14 days after the franchisor becomes aware of them.
As a current franchisee, you can also submit a written request to your franchisor for an up-to-date disclosure document at any time. Your franchisor is then obliged to provide this to you within 14 days. However, keep in mind that you only have the right to make one such request every 12 months.
During the term of your franchise agreement, hopefully you won’t find yourself in dispute with your franchisor. However, if this does happen, the Code includes measures to assist with the resolution of disputes. For example, if you want to raise an issue with your franchisor, the Code requires that you write to them first with details of your complaint.
Before any other action is taken, you and your franchisor must attempt to resolve the dispute through negotiations.
If the dispute remains unresolved after 21 days, either you or your franchisor may refer the matter for mediation. If you decide to request mediation, your franchisor is compelled to attend the session and genuinely try to resolve your dispute. The Code presents you with an option of referring disputes to the Office of the Franchising Mediation Adviser (OFMA).
If you have a dispute with your franchisor that is unable to be resolved through direct negotiation, you may wish to contact OFMA in order to have your matter mediated. OFMA can be contacted on 1800 150 667. Being aware of your rights relating to ongoing disclosure and the framework for dispute resolution will help you get the most out of your franchise agreement during your term, and interact with your franchisor in useful and effective way. The Code provides a framework for various situations in which you may find yourself leaving your franchise system.
Leaving your franchise system before the term of your franchise agreement expires
If you want to leave the franchise system voluntarily, by transferring your franchise to someone else, you must request your franchisor’s consent in writing. Your franchisor may not unreasonably withhold consent. The Code states that if your franchisor does not respond within 42 days, consent is taken as given.
If your franchisor wishes to terminate your franchise because you have breached the agreement, they must give you reasonable notice of the breach, tell you what needs to be done to fix it and allow you reasonable time (but not more than 30 days) to do this. If you fix the breach within this time, your franchisor will be unable to terminate your franchise on this ground.
If your franchisor wishes to terminate the franchise and you have not breached the agreement, the Code requires your franchisor give you reasonable written notice of the termination and their reasons for it. This right to terminate will not apply if the franchise agreement prohibits the franchisor from terminating the agreement prior to the expiration of the term.
The Code also places an obligation on your franchisor to provide you with notice as to whether they intend to renew your franchise agreement once the term ends, or if they want to enter into a new agreement. This notice must be provided to you at least six months before the end of the term, unless your entire term is for a period of less than six months. In this case, your franchisor must provide you with at least one month’s notice.
In a franchise agreement, there may not be an obligation on the franchisor to renew a franchise agreement after it has expired.
The ACCC is an independent statutory body responsible for promoting competition and fair trading.
Its primary responsibility is to ensure that businesses and individuals comply with Australian competition, fair trading and consumer protection laws under the Competition and Consumer Act 2010 (the Act), which incorporates the Australian Consumer Law.
The Code is a mandatory industry code of conduct, given the force of law under the Act. The ACCC consequently has a role in ensuring franchising industry participants comply with their obligations under the Code.
The ACCC investigates alleged breaches of the Code and can take enforcement action where appropriate. The ACCC cannot pursue all of the complaints it receives, and will exercise its discretion to direct resources to the investigation and resolution of matters that provide the greatest overall benefit for competition and consumers. The ACCC’s Compliance and Enforcement Policy, updated in February 2013, provides guidance as to the factors that influence the exercise of this discretion.
The ACCC can institute legal proceedings against a franchisor if the Code is breached. However, the ACCC is unlikely to take action for a breach of a franchise agreement unless the conduct also forms a contravention under the Act or the Code. You also have a right to private action under the Act; if you feel your franchisor has breached the Act, you should seek legal advice.
If you believe that your franchisor has breached the Act or the Code, you can also contact the ACCC on the dedicated small business hotline on 1300 302 021.
Dr Michael Schaper is deputy chairman of the ACCC. The ACCC has several franchising publications containing useful information for prospective franchisees, including a Franchisee Manual and a DVD about the code. These are available at www.accc.gov.au/franchising or by calling the ACCC’s Small Business Helpline on 1300 302 021.
The ACCC in conjunction with Griffith University offers a free, online training course for potential franchisees. Franchisees can also learn more about their rights and responsibilities under the Act by accessing a free online education program for small businesses, funded by the ACCC. For further information and to access these courses, please visit www.ccaeducationprograms.org
The Federal Government has instigated a review of the Franchising Code of Conduct which was made public in May 2013. Any changes which may flow from the review have not yet been announced.
For more information contact:
Phone: 1300 302 502