A new Franchising Code of Conduct (Code) takes effect from 1 January 2015 and impacts on future dealings between franchisees and franchisors. TheCompetition and Consumer (Industry Codes – Franchising) Regulation 2014 (Cth) was released on 3 November 2014 following the release of an exposure draft of the Code earlier in 2014 and lengthy consultation with stakeholders.

Introduction

The Code is a mandatory code that is prescribed under the Competition and Consumer Act 2010 (Cth) (Act). The Australian Competition and Consumer Commission (ACCC) is responsible for the administration and enforcement of the Code.

The purpose of the Code is to regulate and assist the ongoing relationship between the franchisee and franchisor.  Broadly, it requires franchisors to disclose specific facts to franchisees and to follow set procedures in their dealings with those franchisees.

2014 ‘Future of Franchising’ Reforms

With effect from 1 January 2015, the current Franchising Code of Conduct has been repealed, and the new Code will apply retrospectively to all franchise agreements entered into after 1 October 1998.  All franchisors will need to understand the effect of the New Code on their networks and adjust their franchise documentation and practices accordingly.

The new Code implements significant changes including, among others:

  • amending the Act to allow the ACCC to:
    • seek civil pecuniary penalties of up to $51,000 from the court
    • issue infringement notices of up to $8,500 without having to seek a court order
  • introducing a general duty on franchisors and franchisees to act in good faith during their dealings with each other.  A breach of this requirement can give rise to liability for a civil pecuniary penalty
  • prescribing a new form of disclosure document to be used by all franchisors which must be updated each year within four months after the end of the franchisor’s financial year.  The new Code contains a transitional provision that a franchisor has until 31 October 2015 to update their disclosure document
  • a requirement to provide a generic ‘Information Statement’ to prospective franchisees as soon as practicable after the prospective franchisee ‘formally applies or expresses an interest in acquiring a franchised business’
  • a requirement for franchisors to maintain a separate bank account for marketing and advertising fees contributed by franchisees.  Franchisors must also contribute to the marketing fund for each corporate unit it operates
  • restrictions on a franchisor’s ability to enforce a restraint of trade at the end of a franchise agreement in certain circumstances.

Key Issues

The new Code embodies most of the existing Code, together with the new changes, but is completely reformatted and renumbered.  While one of the intents of the Commonwealth government has been to reduce red tape, the new Code is no shorter than it was.

The description of good faith, being ‘within the meaning of the unwritten law from time to time’, is unusual and it is unclear whether a common law duty of good faith applies.  It appears that it is being left up to the courts to interpret the definition of good faith.  It is likely that there will be deliberation on what constitutes good faith if the Code is reviewed by the courts.