After much anticipation the new Franchising Code of Conduct (Code) came into effect from 1 January 2015. However, the application of the Code is not always so straight forward as saying “all clauses of the Code apply from 1 January 2015.” It is necessary to understand when different clauses of the Code are applicable, whether provisions from the old Code can still apply and what time considerations you should be conscious about.
The explanatory memorandum that introduced the Code has been drafted with the aim of providing the greatest possible coverage of existing and future franchise agreements. The Code is not intended to act retrospectively.
For example, a failure to act in good faith in November 2014 would not constitute a breach of the new good faith obligation. However, a breach from 1 January 2015 onwards would.
In most instances, clause 3(1) of the Code states it applies to conduct occurring on or after 1 January 2015 (other than to discharge an obligation under the old Code) in relation to a franchise agreement entered into on or after 1 October 1998.
There are however exceptions to this provision contained in clause 3(4) of the Code which states that:
- Clauses 21(2) (place to being proceedings), 22 (costs of settling disputes) and 23 (effect of restraint of trade clauses)do not apply to franchise agreements entered into on or after 1 March 2008 but before 1 January 2015; and
- Clauses 20(1)(b) (waiver of representations), 21(2) (place to bring proceedings), 22 (costs of settling dispute) and 23 (effect of restraint of trade clauses) do not apply to franchise agreements entered into after 1 October 1998 but before 1 March 2008.
However, clause 3(4) ceases to apply, if the franchise agreement is varied or transferred on or after 1 January 2015.
For example, a franchise agreement entered into in July 2010 contains a provision requiring a party bringing an action in relation to a dispute under the agreement to bring the action in New South Wales, even though the franchise business is based in Queensland. In March 2015 one of the parties commences an action in New South Wales. This is not a breach of clause 21(2) – which prohibits a franchise agreement containing a clause requiring a party to the agreement to bring an action in any State or Territory outside that in which the franchise business is based – as clause 21(2) is stated not to apply by virtue of clause 3(4). Thus the provision in the agreement remains valid.
However, if the franchise agreement is varied in February 2015, the agreement will there be covered by the amendments to the Code and therefore the provision requiring the action to be brought in New South Wales would be void.
CONTINUING OBLIGATIONS UNDER THE CODE
All parties will be required to adhere to their obligations that arose under the previous version of the Code regardless of the introduction of the amended Code on 1 January 2015. The Competition and Consumer (Industry Codes – Franchising) Repeal Regulation 2014 (Regulation) provides that the repeal of the old Code “does not affect any right, privilege or liability acquired or incurred” under the previous Code before 1 January 2015.
For franchisors, this means that any obligations under the previous Code that extend past 1 January 2015 are entitled to have fulfilled such obligations.
For example, clause 14 of the previous Code required franchisors to provide the franchisee with a copy of the lease within one month of it being signed. Clause 13 of the new Code also requires this but in addition requires the franchisor to provide details of any incentive or financial benefit that the franchisor is entitled to receive as a result of the lease and it is also a civil penalty provision. If a franchisee leased premises from a franchisor on 9 December 2014 then the franchisor would have to comply with the obligations under the previous Code, meaning they would have to provide a copy of the lease to the franchisee by 10 January 2015 but they would not have to provide the additional details. Further, if they failed to provide a copy of the lease by that date then they would be in breach of the previous Code but would not be liable for a civil penalty provision.
Franchisors must be aware that whilst the previous Code has been repealed, they must comply with any continuing obligations which did not expire on 1 January 2015, otherwise they will be in breach of the previous Code. Practically, this means a franchisor may have to comply with two regulatory regimes as it possible for clauses from the previous Code and clauses from the new Code to apply concurrently.
Section 8(1) of the Code, provides that a Franchisor must create a disclosure document that complies with sections 8(3), 8(4) and 8(5) of the Code which relate to the form of the disclosure document. In addition, the Franchisor, after entering into the franchise agreement is required to update the disclosure document within four months after the end of each financial year.
However, section 8(1) of the Code does not apply if a franchisor has an existing disclosure document. An ‘existing disclosure document’ means a disclosure document within the meaning of the previous Code that existed pre 1 January 2015. However, this exception has a time limit. Section 5(2) of the Regulation states:
- The existing disclosure document may be given under the amended Code before 1 November 2015;
- The franchisor must update the existing disclosure document at latest so that it complies with subclauses 8(3), (4) and (5) by 31 October 2015 or within four months of the end of its financial year (whichever is the earlier); and
- The requirements of subclause 8(6) of the amended Code apply to a financial year that begins on or after 1 January 2015 and it is a civil penalty provision if there is failure to comply.
A franchisor can choose to update the disclosure document earlier. Once it has been updated the other provisions of the Code apply so, for example, the franchisor must comply with sub clause 8(6) which states that the disclosure document must be updated within four months after the end of each financial year.
CAUTION - DISCLOSURE DOCUMENTS CONFUSION
There are some ‘grey areas’ in regards to the application of the amended Code. For instance, where a disclosure document was given prior to 1 January 2015, yet the franchise agreement is not entered into until after this date. If the agreement is entered into after 1 January 2015 then it is clearly subject to the amended Code. Under both the previous and amended Codes, at least 14 days before entering the franchise agreement, the franchisor has to give the franchisee a copy of the Code, disclosure document and the franchise agreement in the form in which it is to be executed.
Seemingly the disclosure document given prior to 1 January would be considered an ‘existing disclosure document’, and thus would not need to be updated before the earlier of either the end of October 2015 or four months after the end of the financial year.
However, in order to comply with clause 9 of the amended Code, the franchisee would need to be given the franchise agreement in a form which complies with the amended Code (as this is the form in which it will have to be executed) as well as a copy of the amended Code.
It may even be wise to update the disclosure document (if necessary) and reissue it to the franchisee before entering into the agreement to avoid any issues and ensure the amended Code is complied with in its entirety right from the start. If you choose to keep the existing disclosure document and an issue arises in the future it would seem that this document will be assessed against the criteria in the previous Code whilst the agreement and any obligations will be assessed against the amended Code.
If you are facing such a scenario you may wish to seek advice on the best way to proceed, prior to executing the franchise agreement.
The amended Code contains a number of changes which will not always be applicable from the get-go to franchises which had agreements in place prior to 1 January 2015. Franchisors must be aware that they will be covered by the amended Code should any variation or transfer of a franchise agreement occur.
Continuing obligations under the previous Code did not expire on 1 January 2015 will still be applicable.
Finally, for franchises with existing disclosure documents (i.e. existing before 1 January 2015) they have a transition period up to at latest 31 October 2015 to update their disclosure document to comply with the amended Code. Franchisors should consider what updates need to be made, when these should occur and should make note of the date when their financial year ends as an update of their disclosure document will be required within four months after this date.
The authors wish to acknowledge Law Clerk Ann-Marie Coleman for her contribution to this article.