The recent changes to the Franchising Code of Conduct (Code) follow from the Joint Committee report into improving conduct in Australian franchising, various expert panels and significant industry consultation. The changes, whilst adding some additional burdens on franchisors, are a positive move for the sector.
When do the changes take effect?
The amendments take effect from 1 July 2010 and apply to franchise disclosure documents issued, and franchise agreements entered into on or after 1 July 2010 (with some exceptions as noted below).
What are the changes?
In addition to a number of minor amendments aimed at increasing consistency and formatting within the Code, there are some significant changes that franchisors need to be aware of including:
- A requirement to inform franchisees, at least six months prior to the end of the franchise agreement, of the franchisor's decision either to renew or not to renew a franchise agreement (except in the case of franchise agreements within a term of less than six months, which require at least one months notice).
- A requirement to disclose all payments that a franchisee may be required to make to third parties, where the expenditure is within the knowledge or control of, or is reasonably foreseeable by, the franchisor. Currently a franchisor is only required to disclose payments to, or collected by, the franchisor or an associate of the franchisor.
- Franchisors must disclose whether the franchisor will require the franchisee to undertake any unforeseen significant capital expenditure that was not disclosed by the franchisor before the franchisee entered into the franchise agreement.
- A requirement to disclose the circumstances in which the franchise has unilaterally varied a franchise agreement in the last three financial years (however there is no requirement to disclose unilateral variations that occurred before 1 July 2010).
- Franchisors also must disclose the circumstances in which the franchise agreement may be unilaterally varied in the future. Franchisors must disclose details of the process that will apply in determining arrangements to apply at the end of the franchise agreement including:
- whether the franchisee will have any options to renew, or extend, or extend the scope of the franchise agreement or enter into a new franchise agreement and what processes the franchisor will use to determine these matters;
- whether the franchisee will be entitled to an exit payment at the end of the franchise agreement and if so, how this will be determined or earned;
- details of the arrangements that will apply to unsold stock, marketing material, equipment and other assets purchased when the franchise agreement was entered into;
- whether the franchisee will have the right to sell the business at the end of the franchise agreement and, if so, whether the franchisor will have the first right of refusal, and how market value will be determined; and
- whether the franchisor will consider any significant capital expenditure undertaken by the franchisee during the franchise agreement, in determining the arrangements to apply at the end of the franchise agreement.
- A requirement to disclose whether the franchisor will amend the franchise agreement on or before transfer or novation of the franchise.
- The inclusion of a list of desirable behaviours to encourage parties to approach the dispute resolution process in a reconciliatory manner including attendance and participating at meetings, making the party's intention clear at the beginning of the mediation process and observing any confidentiality obligations that apply during or after the mediation process.
- The inclusion of an express statement in the disclosure document that franchising is a business and, like any business, the franchise (or franchisor) could fail.
- A requirement that franchisors disclose whether the franchisor will attribute their dispute resolution costs to the franchisee.
- A requirement to disclosure whether confidentiality obligations will be imposed by the franchisor on the franchisee including details of matters that the obligation may cover including the outcomes of mediation, settlements, intellectual property and trade secrets.
The amendments to unilateral contract variation and unforeseen capital expenditure have a stepped introduction. Franchisors will only have to provide information for one financial year after the first year of operation of the new provisions (2010-2011), two financial years after the second year of operation (2010-2012) and so on until the provisions are fully operational in 2013.
The Government has not included a new statutory good faith obligation, instead clarifying that nothing in the Code limits any obligation imposed by the common law on the parties to a franchising agreement to act in good faith.
There was no further mention of the short form plain English guide proposed in previous announcements.
What should franchisors do to prepare for the changes?
Franchisors must ensure any disclosure document issued or franchise agreement signed after 1 July 2010 incorporate the changes. This may place additional pressures on franchisors that would otherwise have had until 31 October 2010 to update their disclosure documents. Franchisors should also review their systems to ensure they are keeping accurate records for disclosure documentation.
Given the introduction of civil pecuniary penalties and the ACCC's new powers to conduct random audits of franchisors it is critical that franchisors ensure their franchise documentation and systems are Code compliant.
The amended Code imposes additional disclosure obligations on franchisors which will benefit potential and current franchisees. The amendments, together with the current disclosure requirements in the Code, are important to ensure that franchisees are well informed before making significant financial investment into a franchise system which in turn should reduce franchising disputes. However, no amount of changes to the Code or additional disclosure requirements for franchisors will guarantee that franchisees will achieve business success.
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