On 1 January 2015, the new Franchising Code of Conduct (Code) commenced as a schedule to the Competition and Consumer (Industry Codes- Franchising) Regulation 2014 (Regulation).

The changes followed the Wein Review, which considered the efficacy of the previous Code with a view to cutting red tape and promoting best practice in the franchise industry (read more here and here).

There are a number of important changes to the Code which parties to franchise agreements or anyone considering conducting business involving the use of the franchise model should be aware:

The duty of good faith

The parties to a franchise agreement must act toward each other in “good faith” within the meaning of the “unwritten law”. A court may have regard to whether the parties acted honestly and not arbitrarily and acted cooperatively to achieve the purposes of the franchise agreement. This obligation is intended to apply to all aspects of the relationship between franchisee and franchisor, including during the negotiation of the proposed franchise agreement.

Parties are still permitted to act in their “legitimate commercial interests”. However, the parties to a franchise agreement should exercise caution – this obligation is directed at “opportunistic” and “unfair” conduct that may fall below the threshold of the more serious misconduct provisions within the Australian Consumer Law or theCompetition and Consumer Act 2010 (Cth) (CCA).

The ACCC has already offered its view as to what the good faith obligation entails, namely that the parties to a franchise agreement “remain loyal to the contract that they have signed” and that it would breach the new good faith obligations if a party was “acting dishonestly, for an ulterior motive or in a way that undermines or denies the other party the benefits of the contract.”

Disclosure requirements

A purpose of the changes has been to reduce red tape for both franchisors and franchisees. For example, the Code no longer requires franchisors to summarise the provisions of the franchise agreement. Further, for master franchisors, the requirement to provide a disclosure document to sub-franchisees has been removed, unless the master franchisor is a party to the franchise agreement.

However, there are also additional requirements for franchisors which are now included in the Code which are designed to improve the information available to franchisees. For example, a prescribed information statement must be provided to a prospective franchisee as soon as practicable after they apply for or express an interest in the franchise. The disclosure document must also set out the impact of the franchisor’s online activities involving the supply of goods or services.

Strengthening the balance in franchise agreements (i.e. further protection for franchisees)

The Explanatory Statement to the Regulation that implemented the Code identified an “imbalance” in the relationship between franchisee and franchisor. There are a number of amendments to the Code which are intended to address this issue. This includes the following:

  • enhanced protection for franchisees against significant capital expenditure imposed by a franchisor – this will require disclosure of the expenditure in the franchise agreement, agreement to the expenditure by a majority of franchisees, that the expenditure was necessary to comply with legal obligations or that the expense is necessary and can be justified by a statement that provides the rationale, costs, anticipated benefits and expected risks of making the investment;
  • the franchisor will not be able to require the franchisee to commence litigation or conduct dispute resolution outside the jurisdiction where the franchisee’s business is located (unless agreed at the time of the dispute) or to attribute the costs of dispute resolution to the franchisee (the latter obligation also applies to franchisees attributing costs to franchisors);
  • restraints of trade imposed on former franchisees will only be enforceable in circumstances which involve a refusal of a request to renew a franchise agreement (involving no breach of the agreement or of IP/ confidentiality requirements by the franchisee) and where there is no compensation paid to the franchisee (or the amount of compensation is nominal or insufficient) for the goodwill of the business; and
  • the franchisor is now required to maintain a separate bank account for advertising and marketing fees and, if the franchisor operates a unit of the franchised business, it must pay the fees on the same basis as the other franchisees..

Penalties and enforcement

The potential financial consequences for breach of the Code that have been introduced may be substantial, if multiple contraventions were proven and the penalties aggregated. The introduction of penalties for a breach of the Code was one of the more controversial recommendations of the Wein Review. A breach of the Code amounts to a breach of the CCA and civil penalties may be imposed for a breach of 24 of the obligations in the Code, including the duty to act in good faith. The amount which may be imposed is $51,000 per contravention.

The ACCC now has the power to issue infringement notices for a breach of the Code, of up to $8,500 for a contravention by a body corporate and $1,700 for a contravention by an individual.

Watch this space

It is early days, and only time will tell how the new Code will be enforced by the ACCC and interpreted by the courts. However, the ACCC has published guidance that incorporates the recent amendments to the Code.

As we outlined in a previous post, the ACCC has not yet released its enforcement priorities for 2015. However, due to the new provisions of the Code, we may see the enforcement of the Code as a priority for 2015.

Franchisors and franchisees should ensure that they are up to speed with the changes, and be mindful of their obligations. Putting in place appropriate controls for dealing with each other in this new Code context will help to manage risk.