News

New Franchising Code of Conduct to Commence on 1 January 2015

Applies to franchise agreements entered into or renewed from 1 January 2015

On 1 January 2015, a new Franchising Code of Conduct will be enacted as part of the Competition and Consumer (Industry Codes – Franchising) Regulation 2014.

The new Code contains penalties of up to $51,000 and new powers for the Australian Competition and Consumer Commission (ACCC) to issue infringement notices of up to $8,500 without a Court order.

It is proposed that the new Code will only apply to those franchise agreements entered into or renewed from 1 January 2015, with the previous Code to continue to apply to those entered into prior to 1 January 2015.

Set out below is a summary of the major changes proposed[1].

Disclosure obligations

The new Code will remove the requirement for the master franchisor to prepare a disclosure document (currently required under clause 6B of the Code in a master and sub-franchisor arrangement), provided that the master franchisor is not a party to the franchise agreement in question.  Instead, the sub-franchisor will be required to provide certain information about the master franchisor to the franchisee.

In addition, franchisors will not have to provide a disclosure document if they have granted only 1 franchise in the past financial year and do not intend to grant another franchise in the following financial year.  A franchisor can use this exemption once in a 3 year period.

Good faith

The new Code will expressly set out that parties to a franchise agreement must act in good faith, which was previously an implied term of all franchise agreements.  This will cover pre-contractual negotiations, disputes and any other dealings relating to the franchise agreement.

The express duty set out in the new Code will not replace or alter any existing duty at common law, and will not exclude:

• each party’s right to protect legitimate commercial interests
• a franchisor not including a renewal clause when negotiating a franchise agreement

Unenforceability of provisions

The proposed new Code will contain new provisions which deem certain clauses in franchise agreements to be unenforceable, including any clause that:

• limits or excludes the obligation to act in good faith
• requires legal proceedings to be commenced in a jurisdiction that is not where the franchisee’s business is located
• requires a franchisee to pay the franchisor’s costs of settling a dispute

Record keeping

The new Code will likely require a franchisor to retain records indefinitely if they support a claim or statement made in a Disclosure Document.  The ACCC may rely on this provision to request a broader range of documents for audit purposes.

Enforceability of restraints at end of term

There is a good deal of conjecture about how the new Code will deal with restraints imposed by a franchise agreement following the expiry of the franchise term.  As currently drafted, it would appear that the new Code will deem restraints of trade as unenforceable if all of the following apply:

1. The franchisee has sought to renew the agreement (and is not in breach of the agreement)
2. The franchisor has not renewed the agreement
3. The franchisee has requested compensation for non-renewal, and genuine compensation is not paid by the franchisor OR the agreement specifically prevents compensation being claimed by the franchisee

Significant capital expenditure

The new Code will likely contain a provision preventing a franchisor from requiring a franchisee to undertake significant capital expenditure unless:

• it has been disclosed when the franchisee entered into or renewed the franchise agreement
• it is incurred and approved by a majority of franchisees
• it is expenditure which is required to comply with legal obligations
• the franchisee agrees to the expenditure (at the time it is to be incurred)
• it is justified by the franchisor in a statement to the franchisee setting out the reasons, amount, outcomes and benefits, and associated risks of the expenditure.

Materially relevant facts

Franchisors will be required to disclose within 14 days a change in the majority ownership or control of an “associate” of a franchisor, as well as certain proceedings issued against an “associate or associate director” of a franchisor. Under the current Code, these changes only had to be disclosed in relation to the franchisor itself.

Marketing and advertising funds

There will be greater controls on how these funds are dealt with and accounted for, including:

• a separate bank account for fees contributed by franchisees
• if a franchisor operates one or more units of a franchised business, it must also pay marketing and advertising fees on behalf of each unit on the same basis as other franchisees
• fees may only be used for expenses that have been disclosed to franchisees under the disclosure document, legitimate marketing expenses or the costs of administering and auditing the fund

 

For further information, please contact:

Catherine Vincent                                                                                                 Senior Associate                                                                                               Phone: (02) 9267 6263                                                                                         Email: Catherine@jemfish.com.au

Greg Jemmeson                                                                                                     Partner                                                                                                           Phone: (02) 9267 6263                                                                                         Email: greg@jemfish.com.au

[1] The Code is currently in draft form only and subject to review before it is enacted on 1 January 2015.