The new Franchising Code: What you need to know
This article appears in the Mar/Apr 2015 issue of Business Franchise Australia & New Zealand
With changes to the Franchising Code of Conduct taking place on 1 January 2015, there are several things franchisees, franchisors and prospective franchisees need to know.
The Franchising Code and what it does
The original mandatory code was introduced in 1998 to regulate the conduct of franchising participants towards each other. The Franchising Code is binding on all industry participants and applies to the 1,160 franchise systems and 79,000 franchise units trading in Australia.
The Code requires franchisors to disclose speciﬁc information to both potential and existing franchisees. The Code also sets out conditions relating to the rights of both parties under a franchise agreement and it provides a way for franchisees and franchisors to try and resolve disputes.
Key features of the new Code
From 1 January, the Code:
• introduces an obligation for parties to act in good faith in their dealings with one another;
• introduces financial penalties and infringement notices for serious breaches of the Code;
• requires franchisors to provide prospective franchisees with a short information sheet outlining the risks and rewards of franchising;
• requires franchisors to provide greater transparency in the use of and accounting for money used for marketing and advertising and to set up a separate marketing fund for marketing and advertising fees;
• requires additional disclosure about the ability of the franchisor and a franchisee to sell online; and
• prohibits franchisors from imposing significant capital expenditure except in limited circumstances.
The good faith obligation
The good faith obligation requires both parties to a franchise agreement to remain loyal to the contract they have entered into. Your conduct may lack good faith if you act dishonestly, for an ulterior motive or in a way that undermines or denies the other party the benefits of the contract. While good faith requires you to have regard to the rights and interests of the other party, it does not prevent you from acting in your own legitimate commercial interests.
Indicators of good faith
• being honest with the other party
• considering the other party’s interests
• consulting with the other party regarding proposed changes
• trying to resolve disputes as they arise (either directly, or through mediation)
• not exercising rights, powers or discretions for an ulterior purpose.
There are new rules that increase transparency and accountability around franchise marketing funds. The Code states that marketing fees paid by franchisees must only be used to meet certain expenses, including ‘legitimate marketing or advertising expenses’. The term isn’t defined in the Code, but something like a billboard or TV ad will be legitimate, whereas putting a logo on the franchisor’s new Lamborghini may not be. Franchisors need to set up a separate bank account for the marketing fund and provide information about how the money is spent. The marketing fund must be audited each year, unless 75 per cent of the franchisees that contribute to the fund vote against the audit.
Use of marketing and advertising fees
Under the Code, marketing and advertising fees may only be used to meet expenses that:
• have been disclosed in the disclosure document
• are legitimate marketing or advertising expenses
• have been agreed to by a majority of franchisees or
• reflect the reasonable costs of administering and auditing the fund.
The Code now requires franchisors to provide prospective franchisees with a short information statement outlining the risks and rewards of franchising. The information statement is a starting point rather than a complete guide to franchising and should be combined with independent legal, accounting and business advice.
In addition, the franchisor’s disclosure document (which the franchisor must give to a prospective franchisee at least 14 days before they enter an agreement or pay non-refundable money) must now contain information about the ability of the franchisor and a franchisee to benefit from online sales.
While there are exceptions, the new Code restricts franchisors from imposing significant capital expenditure on franchisees. The Code doesn’t define ‘significant capital expenditure’, but it does set out a range of circumstances where franchisors can require franchisees to incur large expenses.
A franchisor can require franchisees to incur expenses where the expenditure:
• was disclosed to the franchisee in the disclosure document that they received before entering into, renewing or extending their franchise agreement
• will be incurred by a majority of franchisees and a majority of those franchisees approve the expense
• is necessary to comply with legislative obligations
• has been agreed to by the franchisee
• is considered necessary by the franchisor as a capital investment in the franchised business, justified by a statement.
Penalties and infringement notices
The Australian Competition and Consumer Commission has new powers to issue infringement notices of $8,500 for body corporates ($1,700 for individuals and other entities) and seek penalties of up to $51,000 in court for serious breaches of certain Code provisions. These changes will go unnoticed by franchisors and franchisees who do the right thing. However, the new powers will play an important role in achieving compliance with the Code. The ACCC will be focusing on particularly serious conduct and, as always, we will take a common sense approach to enforcing the Code.
The new Code will impose one set of obligations on all franchise agreements entered into, renewed, extended or transferred after 1 October 1998. However, a small number of Code provisions will not apply to agreements entered into prior to 1 January 2015.
More information on the Code is available at www.accc.gov.au/franchisingcode or by calling the ACCC Small Business Helpline on 1300 302 021.
You can also find out about the changes to the Franchising Code by viewing the ACCC’s industry webinar which was recorded on 9 December 2014.
You should seek legal advice if you are still uncertain about your rights and obligations under the new Code.
Dr Michael Schaper is Deputy Chair of the Australian Competition and Consumer Commission.
The ACCC is an independent Commonwealth statutory authority. The ACCC enforces and encourages compliance with the Competition and Consumer Act 2010 which includes the mandatory Franchising Code of Conduct.
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