Franchisors and franchisees need to be aware of their changed rights and obligations under the new Franchising Code of Conduct (“New Code”).
The New Code commenced on 1 January 2015, replacing its predecessor with a raft of changes aimed at reducing “red tape” and ensuring franchise industry participants are following best practices.
As with its predecessor, compliance with the New Code is mandatory. It regulates conduct occurring after 1 January 2015 but covers all franchise agreements entered into from October 1998.
Obligation to act in good faith
Although the previous Code provided that nothing in that Code limited the parties acting in good faith the New Code introduces a positive obligation on parties to the franchise arrangement to act towards each other “in good faith”. This obligation cannot be excluded by the terms of the franchise agreement. “Good faith” has not been specifically defined but will have the meaning given to this term by Courts in various decisions. In determining whether a party has acted in good faith, a critical factor will be whether a party has acted honestly and not arbitrarily and whether the party has cooperated to achieve the purposes of the agreement. The ACCC says “Acting dishonestly, for an ulterior motive or in a way that undermines or denies the other party the benefits of the contract would breach the good faith obligation.” However, the obligation to act in good faith does not of itself prevent a party from acting in their legitimate commercial interests. The obligation to act in good faith applies to franchisors and franchisees, both actual and prospective and operates during all stages of the relationship including negotiation, renewal or extension of a franchise agreement and dispute resolution.
To reduce red tape, changes have been made to the franchisor disclosure requirements. For example, master franchisors no longer need to give a disclosure statement to sub-franchisees (unless the master franchisor is also a party to the franchise agreement) and franchisors no longer need to provide a summary of the provisions of the franchise agreement in the disclosure document. There are, however, some new obligations in relation to disclosure statements, including a requirement that the franchisor disclose to the franchisee whether the franchisor sells, or expects to, sell its goods online and whether the franchisee is to be allowed to sell its goods online. This requirement has been introduced to ensure that franchisees are aware of whether their franchise business will be competing with the franchisor’s online sales. The New Code also contains a standard information statement which must be given to prospective franchisees as soon as practicable after they express an interest in acquiring a franchised business. The information statement is a generic document designed to inform prospective franchisees of the risks and rewards of franchising.
Restraint of trade clauses
Franchisors frequently seek to legally bind franchisees from competing with the franchise after the franchise agreement ends. However, it has been recognised that franchisees may develop their own substantial goodwill and that it is unfair to prohibit them from competing with the franchise unless they are compensated for this goodwill at the end of the franchise agreement. To address this imbalance, under the New Code a restraint of trade clause will be invalid in circumstances where:
- the franchisee sought to extend the franchise agreement but the franchisor has not agreed to do so;
- the franchisee has not breached of the franchise agreement or any related agreement;
- the franchisee has not infringed the intellectual property of or a confidentiality agreement with the franchisor; and
- no or insufficient compensation for goodwill has been provided to the franchisee at the end of the franchise agreement.
Other new franchisee protections
Capital Expenditure Limitation
Franchisors can no longer require franchisees to undertake significant capital expenditure, except where the expenditure:
- has been disclosed to the franchisee in the disclosure document;
- is required to comply with legislative obligations;
- has been approved by, and is required of, a majority of franchisees; or
- is justifiable given the costs and likely benefits.
Franchisors are now required to keep these funds in a separate bank account and ensure they are used for legitimate marketing purposes.
Franchisors must keep signed copies of documents required to be given by the Code to the Franchisee for at least 6 years after it is created.
Consent toTransfer of Franchise
Despite having given its consent to a transfer of a franchise agreement the franchisor is now entitled to revoke the previous consent provided it is done in writing within 14 days of having given the consent and it is based on one of the circumstances under the New Code.
Civil penalties and infringement notices
The ACCC has been given additional powers to obtain civil penalties from a Court for certain breaches of the New Code and to issue infringement notices. Examples of conduct which can attract a civil penalty include failing to act in good faith; failing to provide or update disclosure documents and failing to disclose material facts to a franchisee upon the franchisor becoming aware of them. The maximum civil penalty which may be payable is currently $51,000. Infringement notices allow parties who have allegedly breached the New Code to pay a lesser amount than the penalty which could be awarded by the court, in return for immunity from court proceedings. The amount payable under an infringement notice is currently $8,500 for a body corporate and $1,700 for an individual.