Review of the Franchising Code of Conduct

This article appears in the November/December 2013 issue of Business Franchise Australia & New Zealand

 

WHAT IT MEANS FOR FRANCHISEES

Earlier this year, the Australian Government appointed franchise industry expert, Mr Alan Wein, to conduct a review of the Australian Franchising Code of Conduct (“the Code”) and report back with recommendations for improvement.

On 24 July 2013, the Government released its response to Mr Wein’s report, adopting most of Mr Wein’s 18 recommendations at least in principle.

Whilst the franchising sector now waits for the Government to reveal exactly how, and when, these changes will be implemented, it is worth considering how the changes are likely to impact franchisees.

Following is a summary of the accepted Code reforms and what franchisees can expect from each change.

1. Notice of End of Term Arrangements to include reminder of franchisee’s entitlement to request current disclosure:

In accordance with clause 20A of the Code, franchisees should receive notice from the franchisor, at least 6 months before the end of the term of the franchise agreement, of the franchisor’s decision to renew the franchise agreement or enter into a  new franchise agreement or neither. The Code is to be amended so that, when franchisees receive such notice, they will also be reminded of their right (under clause 19 of the Code) to request a copy of the franchisor’s current disclosure document,  provided they have not already made such request in the previous 12 months.

2. Alternate disclosure requirements for foreign and master franchisors:

Franchisees appointed by a master or foreign franchisor can expect to receive an alternative, short-form disclosure document, rather than a disclosure document in the form set out at Annexure 1 of the Code. The content of such short-form  disclosure document is still to be determined by the Government in consultation with franchising sector participants. Also, foreign and master franchisors will be exempt from the obligation to annually update disclosure documents.

3. Online Sales disclosure:

Franchisees can expect to be provided with additional disclosure of the respective rights of the franchisee and the franchisor to conduct and benefit from online sales, and disclosure of the franchisor’s intention or ability to conduct online sales.

4. Removal of Annexure 2:

Annexure 2 of the Code, containing a short form of disclosure document for franchised businesses with an expected annual turnover of less than $50,000 will be removed on the basis that it is not used in the industry. Accordingly, franchisees  purchasing franchised businesses with a lower expected turnover will still receive a “long form” disclosure document in accordance with Annexure 1.

5. Risk Statement to be provided:

New franchisees (not those renewing or extending or extending the scope of an existing franchise agreement) will receive, at an early stage in their dealings with the franchisor, a risk statement alerting the franchisee to relevant matters, such as:

• the need to consider whether the franchise system is a good fit;
• the importance of obtaining professional advice from an advisor with expertise in franchising;
• the need to research the franchise system, including speaking with current and past franchisees, and to carefully review the disclosure documents;
• the potential that the franchisee may incur unforeseen significant expenditure;
• the risks of franchising generally and the need to consider any risks specific to the franchise system; and
• what a prospective franchisee should consider before deciding to enter into a franchise agreement.

6. Rights in Insolvency:

The Government has accepted in principle, but intends to further consult with the franchising industry and relevant experts regarding the implications of, the following recommendations:

• that the Code include a right for both franchisors and franchisees to terminate the franchise agreement if the other party enters into administration and the administrator fails to turn the business around or procure a buyer for the franchise system  within a reasonable time (Mr Wein suggested 60 days); and

• that the franchise fee be notionally apportioned over the term of the franchise so that the pro-rated amount relating to any unexpired portion of the term becomes a debt owed by the franchisor to the franchisee if the franchise agreement ends due to the franchisor’s insolvency.

Depending on how these changes are implemented, franchisees will likely have the right to terminate their franchise agreement and seek to recover a proportion of any franchise fee paid if the franchisor fails.

7. Removal of requirement to disclose “Unforeseen capital expenditure”:

Item 13A (which was introduced as part of the July 2010 Code changes) will be removed. Franchisees will therefore no longer receive disclosure of whether the franchisor will require them to undertake unforeseen significant capital expenditure that  was not disclosed before the franchise agreement was entered into. However, franchisees will receive a list of common examples of potential unforeseen capital expenses in the generic risk statement (see paragraph 5 above), and franchisors will be  obliged to demonstrate that any significant capital expenditure required is reasonable when it was not initially disclosed.

8. Regulation of Marketing Fund:

The Code will be amended to make the administration of marketing and other cooperative funds more transparent and ensure that monies are spent on legitimate expenses related to marketing and advertising the franchise system.

Also, franchisees will now be permitted to vote each year as to whether an audit of the marketing fund is required (rather than having prior votes remain in force for 3 years).

9. Good Faith Obligation:

As a result of the introduction of an express obligation, both franchisees and franchisors will have a legislative duty to act in good faith towards each other in connection with the franchise agreement. All parties can expect the Government and the  ACCC to provide guidance and education regarding the application of this duty.

10. Request for non-disclosure of franchisee’s details:

It will be up to franchisees to initiate any request under Item 6.6 that its details not be disclosed in the franchisor’s disclosure document, and franchisors will no longer be able to prompt such request.

11. Franchisor’s consent to transfer or novation of franchise:

Amendments to clause 20(4) will mean that franchisees must take all reasonable steps to provide information required by the franchise agreement to enable the franchisor to consider granting its consent to a proposed transfer of the franchise.

12. Restraints:

Franchisees may no longer be bound by any restraints of trade in specific circumstances where the franchisee wishes to renew the franchise agreement and is not in breach of its terms, but the franchisor does not renew or extend the franchise and the Agreement does not grant the franchisee any right of compensation in the event of nonrenewal.

13. Dispute Resolution Conduct:

Franchisees (and franchisors) will be expected to display the appropriate reconciliatory behaviours set out in clause 29(8) during any mediation or dispute resolution process, whether pursuant to the Code or otherwise.

14. Dispute Resolution Costs:

Franchisors will no longer be able to oblige franchisees to pay their legal costs of dispute resolution unless a court so orders, and franchisees will have the right to ensure any dispute is heard by an appropriate forum (e.g. a court in the jurisdiction where the franchisee’s business is located).

15. Enforcement:

Changes to the Competition and Consumer Act 2010 will grant the ACCC greater powers to enforce compliance with the Code and penalise breaches. Such powers will include wider audit rights and the issuing of fines. Courts may also be allowed to ban persons from being involved in the franchising sector.

16. Motor Vehicle Dealerships:

The Government will consult relevant stakeholders regarding an analysis of standard contract terms for automotive dealerships prior to any further review of the Code.

17. No further Code review for five years:

Franchisees will have the certainty and comfort of knowing that the Government will not review the Code again for some time. Mr Wein recommended that any further review of the Code should not take place for at least another five years after this  review process is completed and any adopted legislative changes are implemented.

18. Clarify Policy Intent of Code:

Franchisees and franchisors alike, and advisors to the sector, will benefit from the Code being amended to clarify the policy intent of its provisions, remove ambiguities and improve consistency within industry practice.

This review is likely to result in the most significant overhaul of the Code since its enactment in 1998. Overall, the recommended changes are intended to improve the regulation of franchising in Australia and the quality of information provided to  franchisees. Whether these aims are achieved will largely depend on the clarity and precision of the drafting of any changes to the Code. The Government has indicated that it is committed to implementing the reforms “as soon as feasible”, and so the  industry is currently awaiting the next step, which will involve the Government’s preparation of a regulation impact statement and then introducing the amending bill to Parliament.

Esther is a Senior Associate at Mason Sier Turnbull, a law firm renowned for its franchising expertise.

Located in Melbourne’s industry heartland, Mason Sier Turnbull has strong commercial law skills and provides clients with sensible solutions.

For more information contact Esther at:
Phone: 03 8540 0200
Email: esther.gutnick@mst.com.au
Web: www.mst.com.au